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| What Factors Signal Likely Home Price Declines? |
| Written by Jonathan Smoke | |
| 06.13.2007 | |
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Discuss this article on the forums. (0 posts) Yesterday’s blog covered the likely downturn in remodeling forecasted by The State of the Nation’s Housing 2007 report. What precipitated this decline was the decline in home price appreciation we have been experiencing for the last year and may well experience for 1-2 years more, as excess supply is slowly absorbed by new households. The Harvard study also showed that a slow down in home price appreciation was a key part of the tipping point that started the overall slowdown in new and existing home sales. From chapter one of the report: “The turning point came in late 2005 when the combined impact of rising mortgage interest rates and higher house prices finally forced out some buyers. Making matters worse, a growing number of foreclosed homes were returning to the market. With home sales softening and house price appreciation slowing, the urgency to buy evaporated and investors began their exit. Although builders pulled back hard on production, the retrenchment came too late.”
Clearly the trends in home prices have an enormous impact on the future performance of housing markets.So, what factors create environments where home price declines are likely? In chapter two of the report, the authors report some findings in search of an answer to this question from a current working paper by Eric Belsky and Daniel McCue: “While some large markets may post significant drops merely because prices inflated ahead of income between 2000 and 2005, overbuilding and employment losses have historically been much better predictors of impending corrections than price appreciation. Indeed, the probability of any price decline—and especially a large one—is much higher in and around periods of overbuilding or a combination of overbuilding, price overheating, and employment losses than in periods of escalating house prices alone (Figure 8).”
)) So, we can learn from this that taken alone the biggest single factor is a large employment loss. The next biggest factor is overbuilding. Tomorrow, we’ll give you a run down of the markets with the biggest employment losses. 
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