During December, home prices declined 1.0% in the twenty largest metropolitan cities, according to statistics [.pdf] released today from S&P. This marks the fifth consecutive month with a reduction in home values. Reductions occurred in nineteen of the twenty largest metro cities, with the greatest decline in Tampa, where prices dropped 2.6%. Eleven of these twenty cities hit new lows in December that were even lower than the rock-bottom levels in early 2009. As these facts indicate, 2010 concluded with poor results for home prices.
Home values consistently depreciated throughout the fourth quarter of 2010, with a total decline of 3.9% for the quarter. This clearly shows how home values are on a negative trend. What’s more, this trend is expected to continue in 2011. The declining pattern in home values is not only a result of an increased supply of homes, but also a decreased demand for homes.
The supply of homes is growing due to a flood of foreclosed homes hitting the market. There were almost 3 million homes repossessed throughout 2010, which is a record amount of repossessions. This surge of foreclosed homes accelerates the decline in home prices. Moreover, most of these homes are not immediately sold and are a part of what is known as the “shadow inventory” of the housing market.
The shadow inventory makes up about a third of the entire residential housing market, according to a fourth quarter analysis from S&P. Shadow inventory includes distressed properties that are currently outstanding, including repossessed properties, recently foreclosed properties, and properties whose borrowers were recently 90 days late on mortgage payments. Experts estimate it will take at least four years to clear this backlog of homes. As a result, the supply of homes on the market is expected to broadly expand in coming years.
At the same time, the demand for homes is expected to not even sustain its current level, but actually decrease. Two primary factors influence a decreased demand for housing in the US economy. First, the high unemployment rate, which has been 9% or higher for 21 consecutive months, reduces the number of prospective home buyers. Second, an aging population in the US decreases the number of individuals who seek home ownership. These two factors are not only indicative of the current stagnation in housing demand, but also the weak expectations for coming years.
With troublesome expectations for housing demand, as well as housing supply, home values in 2011 will likely see a continuation of the poor results in the fourth quarter of 2010. Overall, as long as the negative trend in home values continues, a recovery in the US economy is postponed.