The Quagmire of Real Estate - Sudden and Dramatic Drop in U.S. Home Prices - Deal of the Century?

Have you been looking to buy a home?  Are you being told that housing is a big gamble?  Is this the deal of the Century?

It sure seems as though there are some great buys.  I mean housing prices have tumbled, so why not buy?  Right?

Isn't home ownership part of the American dream?

I have people that tell me this is the best time ever to buy - you would be crazy not to buy now.  I also have a lot of people saying you would be crazy to buy - why put money in a sinking ship.

So what to do?  Well, some new reports have sounded another alarm as to buying now.  Is it really time to buy?

Clear Capital (www.clearcapital.com), is issuing this special alert on a dramatic change observed in U.S. home prices.

“Clear Capital’s latest data shows even more pronounced price declines than our most recent HDI market report released two weeks ago,” said Dr. Alex Villacorta, senior statistician, Clear Capital. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”

This special Clear Capital Home Data Index (HDI) alert shows that national home prices have declined 5.9% in just two months and are now at the same level as in mid April 2010, two weeks prior to the expiration of the recent federal homebuyer tax credit. This significant drop in prices, in advance of the typical winter housing market slowdowns, paints an ominous picture that will likely show up in other home data indices in the coming months.

2% drop in two months is HUGE.  Scary huge. 

And Clear Capital is not alone.  Gary Shilling (he of S&P/Case Shiller) says single-family home prices will drop another 20% over the next few years with number of homeowners underwater to rise from 23% to 40%.

20% further decline!!!  That means if you buy now and put 20% down, YOU WILL BE UNDERWATER in the next few years.   You will loose everything you put down!  

But even worse, that 20% decline is based only on real estate prices returning to the norm (the average historical norm for house prices).   Excess inventories of 2.1 million are the "mortal enemy" of prices says Shilling. "A 20 percent decline would bring us back to the long-term trend, all the way back to 1890. I am a great believer in reversion to the norm".

What does Shilling mean by "the norm."  The norm is the average historical price for homes SINCE 1890.  And current prices are still well in excess of the norm. 

More importantly, a 20% decline just brings us back to the norm.

A lot has been said about home prices falling and how the decline is "as great as the Great Depression."  But that is misleading.  Housing prices during the 1920's were not as high as we have recently seen.

How bad could it be?

The Case-Shiller Index in its entire 110-year history had never crossed 140 until the recent bubble. In 2006, it reached 210. Every single real-estate bubble in the past has at best been followed by a fall back to at least the 110 level in the postwar era, although the bubble preceding the Great Depression witnessed a fall to 60.

WOW!

So historically, a fall of 20% doesn't even look bad!  What about a decline of another 50%?

Yes, if prices were to do what they did during the Great Depression, prices could fall a lot more.

When you look at the graph of the Case-Shiller residential real-estate index, an index dating from 1890 to the present and an index which measures the cost of housing in comparison to other goods, the first thing you see is that the 2001 to 2006 bubble stands out like the Empire State Building in a patch of daisies. There simply has never been anything like it before.

Where will prices go?  I have no idea.  But I also have no idea if now is a good time (or a really horrible time) to buy a house.