Real Estate: Why home prices won't bottom out

Wed Nov 16, 2011 2:30pm EST

A sign advertising a home for sale lies on the ground outside a home in Pacifica, California December 31, 2008. REUTERS/Robert Galbraith

A sign advertising a home for sale lies on the ground outside a home in Pacifica, California December 31, 2008.

Credit: Reuters/Robert Galbraith

Related Topics

(Reuters) - Watching the U.S. home market struggle to rebound is like listening to children in the back of a car. No, we're not there yet.

The National Association of Realtors reported that ten real estate markets are "leading the nation toward a general recovery and stability of the housing sector," but myriad problems are going to weigh down the housing market for months to come.

The lingering malaise in the economy has triggered a new wave of defaults and foreclosures. After five straight quarterly drops, foreclosures nationwide shot up 14 percent from the second to third quarter this year, according to data released by Realtytrac, the foreclosure information service (see, in October.

While RealtyTrac doesn't foresee that the latest foreclosure wave will equal the severity of the 2007-2010 pattern -- in which three million borrowers lost their homes -- it's going to slam on the brakes where areas are getting hit the hardest.

In theory, it should be a good time to buy a home. In the worst-hit areas, properties have lost more than half their value.

Yet as the average 30-year mortgage rate has slipped below 4 percent, the combination of employment insecurity and unusually tight standards for lending are discouraging buyers en masse. Lenders are asking for extensive income verification and tax returns. One lender I contacted for refinancing even wanted me to get an accountant to certify that I wasn't lying to the IRS.

Here are some of the biggest roadblocks:

--Even in bruised cities where price appreciation is evident, unemployment is still too high. Six out of 10 of the "top turnaround towns" listed by (see for the third quarter had jobless rates above 10 percent. People can't buy homes if they're not working or soon to lose their jobs. Those cities, which include four of the largest cities in Florida, still have a long way to go to recover from the housing bust.

--Although at a record low, the home mortgage rate may still be high relative to home prices. This may sound counterintuitive, but research from the Leuthold Group in their November newsletter shows that a "real" mortgage rate -- which factors in the falling market value of the home prices -- is 8 percent. Leuthold says that real cost of buying must include the 4 percent interest rate and the 3.9 percent average home prices decline over the past 12 months. That cost is still scaring away buyers.

--The combination of unemployment, high housing inventory and foreclosures is hurting places where there wasn't an excessive price run-up. found that the largest year-over year median listing price decreases through October were in cities like Chicago, Detroit and Atlanta. This three-punch combination will continue to ravage markets where there's a sluggish economy

Possible solutions to the housing blockage range from the radical to the necessary. A group called Remortgage America ( is calling for the government to loan Americans mortgages at 1 percent to finance a new or existing residence.

Others would like to see Fannie Mae and Freddie Mac take the foreclosed homes they own and either auction them off or offer them in a huge fire sale.

The seized mortgage agencies account for up to one-third of foreclosed homes -- about 250,000. American taxpayers are pouring tens of billions into propping up these two wards of the state, which were taken over by the U.S. Treasury in late 2008. The Obama Administration has yet to announce what it wants to do with the companies. Will they be restructured, liquidated or privatized?

A third option, which may have the least impact on a battered market, is to offer foreclosed homes in rent-to-own deals. Prospective homeowners get a place to live under reasonable leases and can build equity toward a purchase.

It's estimated that some 3.4 million foreclosed homes will be on the books of banks and mortgage companies by the end of this year. As regulators, banks, mortgage companies and state attorneys general move sheepishly to unblock mortgage modifications, refinancings and resales, only one certainty prevails: The open market will not be able to properly price every property until all government restrictions are lifted on their sales and re-financing.


The author is a Reuters columnist. The opinions expressed are his own.

(Editing by Lauren Young and Beth Gladstone)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see
Comments (16)
How about a more obvious reason why home prices will not rise ….

They are still over priced in 100% of markets with respect to personal income growth, inflation and historic trends.

Try some common sense.


Nov 17, 2011 7:36am EST  --  Report as abuse
anarcurt wrote:
The rent is still too damn high. The mortgages are too.

Nov 17, 2011 8:59am EST  --  Report as abuse
mizugori wrote:
I have been looking for a home in the greater NYC area for about six months now and let me tell you something, prices are still absurd. The biggest problem I see is NOT the banks! I found it rather easy to get qualified for a high loan. However, I view purchasing property as an investment first and foremost, and right now most people are still expecting to get 2006 rates for their houses. It is totally ridiculous. These people need to get their heads out of the clouds. The truth is a lot of people made bad, emotionally-based judgements and purchased severely over-priced homes in the mid 2000s, and now they are trying to refuse to accept that loss. It’s time to man up and accept the fact that you blew, and list your house for what it’s worth regardless of what you paid for it. If you don’t like that, DON’T SELL! Sit there and keep letting the mortgage payments bleed you dry; just do me a favor and don’t come crying to the government later and ask for the taxpayers to bail you out because you bought something you couldn’t afford, and then further compounded the problem by listing it for an exorbitant price and refusing to negotiate anywhere close to actual value.

Nov 17, 2011 9:02am EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.