The Housing Chronicles Blog: Just. Not. Getting. It.

Friday, September 5, 2008

Just. Not. Getting. It.

According to an article in the WSJ, ‘Foreclosure Effect on Home Prices May Be Small’, three economists from the National Bureau of Economic Research (it may be my ignorance, but who are these guys and where have they been?) are saying prices will only go down about 6% from 2007 to 2009:

Even in the face of an extreme foreclosure wave such as that experienced in 2007, our evidence indicates that foreclosure shocks have relatively small effects on U.S. house prices,” the authors, Charles Calomiris of Columbia University and Stanley Longhofer and William Miles of Wichita State University wrote.

The authors’ model incorporated MBA foreclosure and Ofheo home price data from 1981 to 2007, and used home foreclosure forecasts for 2008 and 2009 from The model included data on employment, building permits and existing home sales. In their paper, the authors said the study was first to estimate the effect of foreclosures on home prices for all the U.S.

Even under an “extreme” foreclosure shock scenario, with foreclosures up 75% compared to the baseline in 2008 and 2009, U.S. home prices only decline about 5.5% between the the second quarter of 2007 to the end of 2009, the authors estimated.

Home prices, they wrote, “are quite sticky,” and “fears of a major fall in house prices, with all of its attendant negative macroeconomic consequences, typically are not warranted even in extreme foreclosure circumstances.”

“We conclude that a reasonable estimate of the future path of U.S. housing market prices is that they will remain essentially flat, on average, for the next two years notwithstanding the large predicted increase in foreclosures,” they wrote.

What warms my negative little heart are the comments on this article. Posters had a good time poking holes in the ‘sticky price’ argument. The comments are a bit pungent, but I am glad that so many people get it. Pricing has been anything but sticky. As the next wave of Alt A loans adjusts, we are likely to see another sharp drop.

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