......... When will we see “the light at the end of the tunnel” on these adjustments? Let’s consider the magnitude of existing imbalances and extrapolate recent trends. Over time, house prices and their rental equivalent value should generally converge. From the mid-1990s through 2005, home prices soared above a measure of rental equivalence. With the dramatic declines in the Case-Shiller index, prices remain approximately 14 per cent above a measure of rental equivalence. At their recent pace of decline, by year-end, national home prices will have fallen a total of nearly 30 per cent and be close to rental equivalence. This expected decline would involve larger declines in the problem regions.
Similarly, even without a pick up in new home sales, by year-end, the inventory of unsold new homes will have receded toward their long-run average. Construction has already begun to decline at a moderating pace, and with inventories approaching manageable levels, new construction will stop falling round year-end. The story is different for existing homes: although further price declines are expected to boost purchases, trimming undesired inventories will take longer.
As these trends unfold, the widespread uncertainty about future home prices will begin to dissipate. Although prices likely will fall further into 2009, trough levels will be closer in sight and expectations will converge toward more modest further declines. This lifting of widespread uncertainty and fears of further dramatic declines will have pervasive implications for financial markets and beleaguered financial institutions..........
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George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
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