Home prices have come down. The 1.7 percent national price decline in August (from a year ago) was the first price decline since April 1995 when prices declined 0.1 percent for one short month. Prices also declined previously to that in both 1992 and 1993, but again for only a single month. The only sustained price decline was a mere two straight months in 1990. There have been no other nationwide price declines since NAR began tracking the data in 1968.

But as I’ve said before – and of more importance to home buyers, sellers and their real estate professionals – all real estate is local. Locally, prices in some Florida markets are currently down by more than 10 percent. Prices in some counties in the D.C. region have also declined close to 10 percent. Over longer periods of time, some local markets have posted very prolonged price declines. Two examples are Los Angeles and Houston.

In Los Angeles, prices declined from $224,600 in the second quarter of 1991 to $167,100 in the fourth quarter of 1996. Los Angeles prices returned to their peak only in 2000. The catalyst for the decline was major job cuts – particularly in industries affected by cutbacks in federal defense spending after the collapse of the Berlin Wall and the subsequent disintegration of the Soviet Union. From peak (1989) to trough (1994) a total of 633,600 jobs were lost in the region.

The Houston housing market also crumbled under the weight of heavy job losses in the 1980s, the result of the oil price collapse and the savings and loan scandal). Home prices in the Houston area fell from $83,700 in the third quarter of 1985 to $56,800 in the fourth quarter of 1988. The $26,900 decline (which now does not sound that large) corresponds to a 32 percent price correction.

It's Not About Jobs
But the current weakening in home prices is not due to any major job cuts that force people to sell their homes at any price. In fact, job creation has been quite robust in those markets currently experiencing price declines (aside from Detroit). Florida added 243,300 net new jobs in the past 12 months. The D.C. region has been consistently adding about 70,000 net new jobs over the 12-month time span for the past three years – essentially a stadium full of people with new jobs every year (and causing similar stadium-related
traffic jams).

Only prolonged job losses, subsequent forced home sales and rising foreclosures will lead to sustained home price declines. So what’s going on with the price declines? It’s the fact that the artificially high demand for home buying has dissipated. What I mean by “artificial” is those buyers who were looking to net quick bucks from flipping properties. At the same time, with prices falling these non-owner occupied homes are being put on the market. That, in turn, artificially elevates housing inventory levels. Higher inventory (more supply) lessens pressure on prices. Hence, prices fall even as the job market continues to steamroll. It will take several months for inventory to ease back down to more manageable, balanced levels. When that happens, home prices will quickly reenter positive territory.

Some have a hard time accepting this common sense logic. UCLA’s Anderson School predicted prices to fall 30 percent in Las Vegas. That was in 2002. (In fact, home prices in Vegas rose from $160,000 in 2002 to $319,000 currently.) Moody’s Economy.com has been getting a lot of headlines recently about its home price forecasts. They call for nation-wide price declines of 3.5 percent and much more significant declines in some local markets: Las Vegas to correct by 13 percent with no price pickup until 2009, and Cape Coral, Florida to fall by 19 percent.

Our forecast is for prices to begin increasing in both of these markets from mid-2007 if not sooner. I am particularly bullish on the Salt Lake City market, which could experience double-digit price appreciation in 2006 and 2007. (Moody’s Economy.com forecast is for a price decline in Salt Lake City. I’ll revisit this in 2007 to see who came closer to reality.)

Brighter Days Ahead
As for the national picture, the elevated inventory will be worked off over the next two quarters. Wages are rising at better than 4 percent and jobs continue to be created – not robustly – but nonetheless respectably with 1.7 million net new payroll jobs in the past 12 months. With home prices falling, the demand will inevitably pick up. The low point will be the fourth quarter of this year. Sales will then steadily climb and with it will come strengthening home prices. In summary, the housing slump is nearly over.