Home price drops exceed Great Depression: Zillow

The price of houses will continue to decline due to excess inventory and high unemployment.  There are millions of foreclosed homes that the banks are keeping off the market.  They are known as the shadow inventory.  I’ve seen some articles put the number of homes in the “shadow inventory” close to 7 million homes.  That is literally years of inventory.

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Unemployment was really at 16.7% in December 2010 (the U-6 number  http://www.bls.gov/news.release/empsit.t15.htm ).  And it is not going to improve until the commercial banks increase lending to small businesses.

Unfortunately, that lending will create rising prices in all goods through the fractional-reserve banking process.  This is what happens when the Federal Reserve doubles the monetary base.  It will lead to huge price increases once the commercial bankers increase lending.

This article from Reuters confirms what we know in our heads.  But the newspapers and the TV news coverage tries to cover these facts up.  They avoid comparisons with the Great Depression because they are taught to believe the great Keynesian lie of consumer spending is the only way to grow the economy.

Lower home prices due to increased foreclosures would further erode the value of mortgage backed securities in the market.  That would make the agency securities on American Capital Agency Corp’s (AGNC’s) balance sheet worth less.  This would also hurt their sale price.  All this should hurt AGNC’s earnings.

However, if the FED buys more MBS after the point they previously said they were going to stop, then things change.  If the FED continues to purchase mortgage backed securities from Fannie and Freddie to bailout the big banks that still have MBS’s on their balance sheets, then this would increase their price in the market due to the increased artificial demand.  AGNC might have to pay more to buy its next batch of agency securities and the risk increases of a collapse in market value of MBS’s if the FED decides to sell some of its MBSs.  They would be propping up the MBS market for a bigger bust later.

Home price drops exceed Great Depression: Zillow

NEW YORK | Tue Jan 11, 2011 8:40am EST

NEW YORK (Reuters) – Home prices fell for the 53rd consecutive month in November, taking the decline past that of the Great Depression for the first time in the prolonged housing slump, according to Zillow.

Home prices have fallen 26 percent since their peak in 2006, exceeding the 25.9 percent drop registered in the five years between 1928 and 1933, the housing data company said in a report on Monday. Prices fell 0.8 percent over the month.

It is a dubious milestone for the U.S. housing market which has failed to gain much traction despite a host of government programs to reduce delinquencies and encourage demand with temporary tax credits and lower interest rates. Many economists expect further price drops, even if there are some anecdotal signs of growing demand, such as in pending home sales data.

"For the next six to nine months, the larger factors affecting the housing market that will produce more home price declines will be the excess inventory of homes, high negative equity and foreclosure rates, and weakened demand due to elevated employment, Stan Humphries, Zillow’s chief economist, said in a blog post.

Declines are accelerating, and it will take a while before falling unemployment and other signs of economic improvement support the market, Zillow said.

Home prices fell at a 0.78 percent pace in November, the fastest since February 2009, the company said.

(Reporting by Al Yoon, Editing by Kenneth Barry)


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Published in: on January 19, 2011 at 1:30 pm  Leave a Comment  

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