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Economic Real Estate Trends – By PMI

After several years of unsustainable gains, house prices are now declining in many parts of the country as well as for the country as a whole. According to the Office of Federal Housing Enterprise Oversight (OFHEO), national house prices dropped for the first time since its price series began in 1991. Prices in the seasonally adjusted purchase-only index fell by 0.3 percent in the fourth quarter of 2007 from the previous year. Even worse, when annualized, the decline in prices between the third quarter and the fourth quarter was 5.1 percent, suggesting
that the downturn in prices was intensifying as 2007 came to a close. Broader measures of house prices, such as that from S&P/Case-Shiller, show four-quarter prices down by a record 8.9 percent in the last quarter of the year, and by 19.8 percent at annual rates in that quarter. Given these large, and intensifying, price declines, how far will house prices fall before they start to recover?

Our models indicate that the decline in house prices is only about one-third to one-half over, due primarily to the magnitude of the supply/demand imbalance in the housing market. This assumes that the current economic downturn is both short and modest, and that the disarray in financial markets ends soon. Given the drop in prices already seen, the broad S&P/Case-Shiller house price index could decline by roughly 15-25 percent. The narrower OFHEO index could decline by a lesser 5-10 percent, because it excludes jumbo loans and the large portion of subprime and Alt-A loans that Fannie Mae and Freddie Mac don’t participate in. The difference between these measures is a rough estimate of how much worse the price decline is likely to be for houses using subprime, Alt-A, or jumbo mortgage financing.

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