This, according to a Moody's report. Nationally, home prices are expected to rebound by 2021. Rebound, or recover, in this case means a return to the peak prices of 2006. Also according to the Moody's report, these dates are for a rebound in nominal prices; an inflation adjusted recovery would take even longer to occur. The full story is here. Not mentioned in the report is shadow inventory, which remains a problem around the country. If home prices follow the "Japan scenario" (i.e., years of deflation), as I think they might, then it is possible they will slip to pre-1995 levels on a nominal basis.
On the left is a chart from the Moody's report, lsiting the expected recovery date for some of the worst impacted cities in the housing crisis.
and the Hang Seng and All Ordinaries. This chart covers the last two years, including the lows of March 2009. Since the market recovery began, the Bovespa Index (red) is up over 60%, and it has easily outperformed the Dow (in blue). But if you compare only the last 12 months, the Dow Jones is outperforming the Bovespa. Click the chart to enlarge.
Prices declined in all 20 markets surveyed. According to Standard & Poor's, this is due to the expiration of the housing tax credit, which lifted the lower end of the market in the spring, and the continiung difficult economy. I am sure, however, that significantly tighter underwriting standards on the part of banks are not helping the situation. In October, six cities hit new lows: Atlanta, Charlotte, Miami, Portland, Seattle and Tampa. Year-over year, home prices were up 0.2% in the 10 city index and down 0.8% in the 20-city index. The full S&P report is here.
The market with the biggest drop in October was Atlanta at -2.9% while Washington DC fared best at -0.2%. Nationwide, according to Standard & Poor's, home prices are back to mid-2003 levels. But for some other cities they have gone further back in time. Take Phoenix (where I live) for example. Home prices are now at March 2001 levels. And I have heard of people who bought here in early 2008, thinking the worst was over, walking from their homes. In Las Vegas, home prices are now at November 1999 levels and in Detroit, home prices are now at December 1994 levels.
Letting insolvent banks fail may be the best strategy. It was for Iceland. First some history: In 2001, banks in Iceland were subatantially deregulated and allowed to take on new risks, including foreign acquisitions. This led to a seven year period of rapid expansion, financed by short-term loans on the interbank market and by foreign deposits, which were attracted by Iceland's high interest rates. (The central bank's main rate was 16% starting in 2007 and, as inflation soared, peaked at 21% in December 2008). But, as the 2008 global financial crisis began, these banks discovered they were unable to roll-over or refinance their foreign debt in the interbank market. No new lenders were willing to step in, given the uncertainty in the financial markets. By then the foreign debt of Iceland's three main banks (Glitner, Landsbanki and Kaupthing) was in excess of 50 billion euros, or about €160,000 per Iceland resident. Without new loans, the banks were insolvent. But for Iceland's banks the core problem, in terms of a central bank bailout, was that the amounts they owed were larger than the reserves of the central bank. The GDP of Iceland at the time was only €5.5 billion.
How did Iceland solve its banking crisis? The boards of Landsbanki, Glitnir Bank and Kaupthing Bank, decided they were insolvent and asked Iceland's FME (Financial Supervisory Authority) for help. FME intervened, borrowing €4.3 billion from the IMF, but only to secure domestic banking and safeguard the public’s deposits. It achieved this by splitting the three major banks into a “new bank” and an “old bank,” a variant on the good bank/bad bank theme. The new banks consisted of domestic operations funded by local deposits. The new banks were managed by banking corporations owned by the Iceland's Treasury and new directors were hired. The old banks were what was left after the transfer out of domestic operations - basically "the activities, assets and liabilities in foreign branches and subsidiaries, mainly funded through the issuance of bonds and foreign deposits...and all derivatives." The boards of the old banks were replaced with a resolution committee, mandated to "protect the value of the assets left in the old banks," and distribute them to creditors, e.g. bondholders. According to the central bank:
"...the old banks will be dissolved and winded down in an orderly manner. The proceeds from the asset sales will be distributed among the creditors in a fair and transparent manner. The resolution of the old banks may take several years. The old banks are now in moratorium, which means the Resolution Committees are in charge of their operations and the Court appointed assistants. It is the responsibility of the government to provide a legal framework acceptable to creditors and in line with best practice, allowing the Resolution Committees to maximize asset recoveries and thereby minimizing the losses creditors will have to absorb. It is very important for the reputation of Iceland that the winding down of the old banks is done in line with best international practice."
In Iceland's scenario, creditors will take the hit, not taxpayers. Per Bloomberg "Kaupthing bondholders can expect to get 26 cents per euro back on their investment, according to brokerage H.F. Verdbref hf." And per the Globe and Mail: "Bank bondholders will be lucky to get 25 cents back on the dollar."
And as investigations proceed in Iceland, some questionable practices were uncovered: the banks were lending to associates to buy bank share which could be used as collateral for loans, with interest deferrred. These same loans were allegedly written off days before the banks collapsed.
Meanwhile the economy of Iceland has rebounded: the main interest rate was just lowered another 0.5% to 5.75%, as inflation is near the target rate. And per the Globe and Mail, the economy grew 1.2% lst quarter, pulling the country out of recession. Finally, the currency that had declined 60% against the euro in late 2008, has now risen 21%.
From the Federal Reserve Bank of Dallas:
Home prices dropped in 18 of 20 cities. The full S&P Case Shiller report for the month can be found here. It states that, as of the third quarter 2010, US home prices are 1.5% below the level recorded a year earlier, and nationwide prices are down 0.7% for the month. Standard & Poor's attributed this to the expiration of the housing tax credit, the continuing poor economy and the large inventory of homes for sale (and goes on to mention the large shadow inventory of homes). Below is the 20-city Case Shiller Index for September:
On average, US home prices are now at the same level they were in mid-2003, and the 20-city index is now down 28.6% from its 2006 peak; however, it is still 4.0% above the April 2009 trough. But the index appears to be heading lower. The hardest hit markets in September were: Cleveland, -3.0%; Dallas, -1.6%; Minneapolis, -2.1%, Portland, -1.9% and Phoenix, -1.5%. The best performing markets were Las Vegas at +0.1% and Washington DC at +0.3%. This was a turnaround, albeit small, for Las vegas, which has been the worst housing market in the country. It is also a change for Dallas, which so far is the least impacted city in the index, with prices now down only 8.1% from the peak. In any case, the new data seems to confirm fears of a double-dip in the US housing market, as 15 of 20 cities are now in negative territory year-over-year.
