Home prices not done falling yet

By Thomas Oliver

The Atlanta Journal-Constitution

I don’t like this anymore than you do.

But here goes: Despite our first positive report on housing prices in forever, the slide isn’t over.

When the latest Case-Shiller Index revealed that prices of metro Atlanta homes increased from May to June — ending our two-year slide into oblivion — a collective sigh was heard from Buford to Jonesboro.

This from folks who two years ago couldn’t have told you whether Case-Shiller was a housing index or a brand of office furniture.

Now, the housing index is followed as closely as the Dow.

And what we hope the index is saying is that we have hit bottom.

But more likely, housing prices will experience what they call a dead cat bounce, a sickly metaphor if ever there was one. But it’s apropos and means that the flicker of light we see isn’t dawn breaking, but rather a lightning strike at midnight.

What will continue pushing prices down?

Unemployment. It hit 10.7 percent in Atlanta last month. It’s going to pass 11 percent and hang around there at least until the middle of next year.

Folks don’t buy houses if they are out of work or worry they might be.

Unemployment also drives foreclosures, which continue unabated despite expensive attempts at loan modifications.

Second-quarter foreclosures and mortgages with at least one payment late hit an all-time high, according to the Mortgage Bankers Association.

Defaults on subprime ARMs are no longer the main culprit. The problem now is fixed-rate prime mortgages, further evidence that unemployment, not robber barons, drives foreclosures.

Foreclosures depress housing prices by adding to the inventory of unsold houses.

Hugh Morton, president and owner of Peachtree Homes, says after months of nada, he sees some interest in buying. But because of the oversupply, buyers are getting prices well below anything that can support builders, much less a recovery.

The Mortgage Bankers Association says the foreclosures picture might start to improve this time next year.

Smarter folks than me, like those at CalculatedRisk, say housing prices historically hit bottom when foreclosures peak.

Which means we will have several more months of price declines after the cat bounces. Maybe another 10 percent.

In the meantime, new lending rules are often forcing appraisers to include foreclosures in a review of comparable sales. That lowers the appraisal, which is often a deal breaker. Both the lower appraisal and the lost sale depress prices.

Christopher Marinac, director of research at Atlanta-based FIG Partners, says foreclosures’ impact on appraisals is the elephant in the living room.

“We need to reinvent the appraisal process,” Marinac says.

Roger Tutterow, economics professor at Stetson School of Business and Economics at Mercer University, says there is growing concern the new lending standards may have gone too far.

By the time we realize we’ve thrown the baby out with the bathwater, irreparable damage to the recovery will have been done in the name of reform.

Bottom line: Prices will fall as more of us lose our jobs and our homes.

I don’t like it anymore than you.

Maybe less.

Thomas Oliver writes a business column. He can be reached at toliver.writeright@gmail.com