Will Housing Hit Bottom in 2014?


Even though the recession officially ended in June 2009, some pretty smart people are saying it will take five years from that point for the U.S. housing market to bottom out.

Right now, the U.S. housing market appears to be stable. Standard & Poor’s Chase-Shiller Home Prices Index saw moderate growth for U.S. home prices in both June and July, with only five of the index’s 20 benchmarks cities experiencing falling home prices (Atlanta, Cleveland, Dallas, Denver and Portland).

So why are the experts predicting another drop in U.S. home prices? It’s all about the fallout from regional housing bubbles, coupled with a dash of unstable household income, says one housing market observer.

Charles Hugh Smith, writing in the Sept. 24 edition of Seeking Alpha, says “the housing bottom many see in 2014 will not usher in a new boom; rather, it will merely mark the transition to a decade (or more) of stagnation.”

Smith bases his call on the “human emotion” factor, which is the biggest determinant of how housing bubbles play out. Homeowners slide from caution to euphoria (and back again) on a reliable basis. When credit was loose and money flowed freely, homeowners were downright giddy about their economic prospects. And they spent accordingly.

But now with the credit spigots tightened and Americans in full retrenchment mode, there’s no impetus to spend the kind of money needed to drive the economy forward. That triggers a Catch-22 situation, where lack of demand for big-ticket items (like a new home) keeps housing prices low. And Smith sees this trend continuing for years.

He also bases his calculation on individual income levels.

"One standard way of assessing the underlying valuation of housing is to compare it with income. When homes are soaring in value, they rise above the historical average of four times median household income. When houses fall in value, they dip to three-and-a-half times the median household income,” Smith says.

Americans’ wallets are getting noticeably thinner. According to the Pew Economic Policy Group, the Great Recession has cost American households about $100,000 in lost income. Phillip Swagel, a former economist with the Treasury Department and author of the Pew Study, says that from June 2008 to March 2009 alone, U.S. households lost the following assets:

  • $66,000 in the stock market
  • $30,000 in the value of their homes
  • $5,800 from unemployment and underemployment, as well as reduced paychecks

With incomes down across the board, there’s little fuel for growth in the U.S. housing market, Smith concludes. Coupled with an avalanche of toxic mortgages, rampant foreclosures, and high unemployment, he doesn’t see things stabilizing until 2014.

“Those counting on a timely resurgence in home valuations,” he writes, “ignore the fundamentals of supply and demand at their own peril.

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