Radarlogic dissents on home prices

Case-Shiller's index still shows price declines, but the larger consensus nationwide is that home-price growth will accelerate. Radarlogic today threw some cold water on all that.  The arguments made by Radarlogic are compelling, although speak primarily to the national level. These factors will affect Colorado home sales, but due to larger demographic trends in the state which presently prevail, these negative factors are likely to have a smaller effect in Denver and northern Front Range markets than in many other parts of the country:

Many observers of the nation’s housing markets are expressing a positive outlook for home prices. We take a different view. We believe that the oversupply of homes relative to demand will prevent sustained home price gains for some time.

Varying market conditions, including foreclosure laws and the size of bank-owned inventories, will result in varying rates of absorption from market to market, but given the current estimates of existing homes for sale1, vacant homes held off the market2, seriously delinquent mortgages3 and underwater borrowers4 relative to the current rate of sales5, we believe the supply overhang will persist at the national level for years.

Excess supply, including homes that are currently for sale and homes that will be put up for sale when prices increase, will prevent sustained home price appreciation. As buyers absorb the supply of homes for sale in a given market and prices start to firm as a result, home owners who are eager to sell but have been unable or unwilling to do so at prior price levels will put their homes on the market. Supply will increase and home price appreciation will cease, and to the extent that the newly unleashed supply exceeds the current demand, home prices will be pushed back down.

While housing markets remain oversupplied, diminution in housing demand will result in renewed decline in home values. We remain concerned that housing demand could suffer a significant blow from forces outside the housing market, and that housing values could decline precipitously as a result.