Home seller denial means protracted slump: James Saft

By James Saft

LONDON (Reuters) - Denial ain't just a river in Egypt, it's the state many from California to Florida are in about the dwindling value of their most important asset: their homes.

The old adage is that markets are driven by greed and fear, but in real estate, with its central place in people's psyches, the transition from one to the other includes a period where many refuse to accept the new reality.

The implication is that we are facing a protracted period of weakness in housing and associated economic activity, rather than a quick purge followed by a return to normality.

Like their kids, homeowners love their houses, and like their kids every home is above average in the eyes of its owner.

But unlike with their children, when the market is going up, homeowners are happy to sell, taking the increase as their due, while buyers are eager to get in before prices get dearer still.

However, when the cycle reverses, as we are now seeing in the United States, sellers tend to wait a long time, sometimes until their hands are forced. Buyers, for their part, figure waiting makes good sense if prices are falling.

So, while prices are slow to fall, transactions slow sharply, as we have seen.

Average U.S. house prices rose 3.2 percent in the second quarter from a year ago, according to the Office of Federal Housing Enterprise Oversight, the slowest rate of gain in a decade. The S&P/Case-Shiller index of national home prices showed a fall of 3.2 percent in the period.

Sales of existing homes fell in July to a 5.75 million unit annual rate, as against 6.32 million at July 2006, while the inventory of unsold houses hit the highest figure in more than 15 years.

The subprime fiasco, and the credit crunch rippling outwards from it, will be forcing some homeowners to sell, and some will lose their houses to repossession. But many others will still be thinking in 2006 terms.

That matters quite a bit to jobs in real estate, construction and finance, all of which are facing a rocky period just about now.

A quick reset of price expectations, and everyone from Mortgage Backed Securities traders to real estate agents to carpenters could get back to business. That doesn't look likely.

SKIING TO RECESSION?

Edward Leamer, the director of the UCLA Anderson Forecast, presented a paper at the Jackson Hole conference arguing that housing should play a great role in determining monetary policy.

"We love our homes," he wrote in the paper, titled Housing, Housing Finance, and Monetary Policy and available here