U.S. Home Prices to Decline Another 3.7% in 2011, Says New Clear Capital Report

U.S. Home Prices to Decline Another 3.7% in 2011, Says New Clear Capital Report

Residential News » Residential Real Estate Edition | By Michael Gerrity | January 7, 2011 8:00 AM ET

According to Clear Capital's latest monthly Home Data Index Market Report (HDI), there was a year-over-year national price change in 2010 of -4.1 percent, and expects another -3.7 percent year-over-year change in 2011. The HDI Market Report provides the most current (through December 2010) and granular analysis of how local markets performed compared to the national trend in home prices, as well as a 12-month forecast of what to expect in 2011.

"In terms of home prices, this past year has certainly been characterized by uncertainty," said Dr. Alex Villacorta, senior statistician, Clear Capital. "Tax incentives and high levels of distressed sale activity had counter effects on home prices which contributed to the fragility of the markets."

"Some housing markets are well on their way to recovery, while others are experiencing a renewed downturn reminiscent of the housing crash only two years ago," added Dr. Villacorta. "Understanding which path a given market is likely to follow is dependent on several key factors, but the two clear drivers are local unemployment rates and the prevalence of distressed homes."

Clear Capital Home Data Index: National Home Price Trends

(Jan. 2006 - Dec. 2011 Forecast)

National home prices in 2010 posted a -4.1 percent year-over-year price change, after a very turbulent year where prices increased 9.7 percent over a 21 week span (late March to mid August), only to be followed by a -9.4 percent price change over the following 19 weeks (September to December).

One-Year Metro Market Forecast

In 2011, national and regional metrics will still provide general price indicators, but more granular analysis will be required for market participants to truly assess price movements. The wild spikes experienced in 2010 will likely be replaced with more gradual price trends this year. Price forecasts show varying levels of decline across all four regions in 2011, with local markets in the West expected to accumulate the largest overall losses.

Local price movements are forecasted to vary significantly as each market reacts uniquely to varying degrees of economic factors, including foreclosure activity and employment rates. For these reasons, receiving immediate updates of how local markets are performing, both current and forecasted, is critical to anyone needing to understand the latest market activity to better manage real estate risk. 

Metro Markets (2011 Forecast, 2010 Observed)

Home prices decline in 70% of major markets in 2010

2010 marked another year of price declines across much of the U.S. as prices faced significant downward pressure with the national unemployment rate staying above 9.5 percent and REO saturation holding above 22 percent throughout the year.

  • Rapid and severe declines subsiding, as only eight major markets experienced double digit price declines in 2010.
  • Six of the 15 major markets that managed price gains were in California (Riverside, San Diego, Los Angeles, San Jose, San Francisco, and Fresno).
  • Year characterized by record volatility, with quarterly prices changes of -4.3% (Q1), +5.8% (Q2), -1.6% (Q3), -3.9% (Q4) through the last four rolling quarters.

In 2010, uncharacteristic volatility occurred in home prices within relatively short time intervals. Of the top 50 major markets, 38 saw price swings of more than six percent at some point last year, driven in large part by the extension of the federal home buyer tax credit. Conversely, from the middle of 2002 through mid 2009 national prices only changed direction once and at no point were there quarterly price swings from negative to positive gains of more than one percent in consecutive quarters. At the beginning of 2010, however, national prices saw a 10.1 percent price swing from price declines to price growth. As the effects of the tax credit wore off, national prices reversed this pattern during the latter half of 2010, posting a 7.4 percent price swing into negative territory for consecutive quarters.

California markets typically showed a faster rebound than other hard hit states as six of the 15 markets managed price gains (Riverside, San Diego, Los Angeles, San Jose, San Francisco, and Fresno). The only major California market to decline was Sacramento (-1.4 percent price change).

Despite renewed downward pressure during the latter half of 2010, only eight markets experienced double digit negative price changes (Dayton, OH; Columbus, OH; Milwaukee, WI; Tucson, AZ; New Haven, CT; Jacksonville, FL; Virginia Beach, VA; and Richmond, VA); a noticeable improvement to the 12 markets that experienced double digit declines in 2009.

In 2011, turbulent markets show signs of stabilization, with notable exceptions

  • Highest performers: Washington, D.C; Houston, TX; Honolulu, HI; Memphis, TN; and   Columbus, OH.
  • Lowest performers (all double digit declines): Virginia Beach, VA; New Haven, CT; Tucson, AZ; Dayton, OH; and Jacksonville, FL.
  • The top 50 major markets should continue to shed the artificial effects of 2010's tax credit and return to a non-incentivized market environment, leading to more consistent price trends. In 2011, these major metros are expected to have a forecast average price change of -3.6%.

2011 should be more consistent, price-wise, both for the better and worse. Typically, markets with both high unemployment and high REO saturation are troubled and will experience large declines. Areas with either one or the other, high unemployment or REO saturation, may be able to stave off big declines if not too severe, but either one can still be enough to drive prices down.

Even though many major markets are forecasted to be down again in 2011, definite signs of overall stabilization are evident. Nationally, nearly half of the yearly declines are expected in the first quarter of the year, leaving unchanged price growth during the middle of the year, and renewed declines in the last quarter of the year. Of the 50 major markets listed above, 14 of them are expected to sustain gains in the latter half of 2011.

The Unemployment Factor

Markets in the West region will struggle to post gains this year, and some, notably in Arizona, may see double digit declines. California markets that posted positive gains in 2010 are unlikely to do so this year, with the San Francisco MSA region (which includes troubled Contra Costa County), to experience the biggest declines. The San Francisco-area MSA is forecasted to experience a -9.3 percent price change for 2011. While this forecasted price decline paints an ominous picture for the Bay Area, the majority of the declines will be centered in Contra Costa County. With the U.S. Bureau of Labor Statistics reporting unemployment rates for Alameda County and Contra Costa County over 10 percent (well above the 9.3% of San Francisco County), downward price trends are expected for the year. As an example of the disparity within the San Francisco MSA, prices in Contra Costa County are expected to change -11.1percent by the end of 2011, while San Francisco County prices are forecasted to post a marginal change of -1.3 percent by the end of the year. Adding further pressure to prices in the Alameda and Contra Costa Counties are the REO saturation rates which are presently nearly double and triple that of San Francisco's REO saturation rate, respectively. Despite these expected declines, a -9.3 percent price change for the MSA in 2011 would still be 7.4 percent above the record lows of early 2009.

The REO Saturation Factor

Arizona markets are forecasted to continue downward in 2011 as well, with Phoenix and Tucson expecting large declines (-9.4 and -11.9% respectively). While unemployment rates in major Arizona cities are less than the national rate, REO saturation, or the proportion of all homes sold as a bank-owned, is more than 12 percentage points above the national level for Tucson and more than 19 percentage points for Phoenix. As more distressed inventory is released into the markets, the supply of discounted properties will bring considerable downward price pressure for the foreseeable future.

Lower-priced homes and high levels of distressed activity combined with a post-tax credit environment in 2010 to help make Ohio's markets great examples of market volatility. With Ohio market volatility forecasted to moderate, Columbus is expected to shake off its -17.0 percent yearly price change in 2010, and return a 2.1 percent change this year. Similarly, Dayton is forecasted to cut in half the 22.3 percent loss it experienced in 2010.

The South region is forecast to have a rough go of it, too, with four of the ten worst declining markets taking place in that region. Virginia Beach, VA is forecasted to post the biggest year-over-year negative price change (-12.8%).

Strong Market Contenders

Major cities in the western Gulf states, and Washington, D.C. are least likely to see high dollar declines in home values. Washington, D.C. follows-up its strong performance in 2010 with an expected 6.5 percent year-over-year price change in 2011. The District will be an interesting market to watch this year, though, because while it's unlikely employment will fall, these numbers have been tempered with the added uncertainty due to the freezing of federal salaries, effective Jan. 1, 2011.

A 7.9 percent state unemployment rate bodes well for major markets in Texas, with home prices forecasted to gain 3.6 percent in Houston and 1.4 percent in Dallas. These projections place Houston and Dallas as the second and sixth highest performing markets of 2011, respectively.

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