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Harvard’s Joint Center for Housing Studies just released its 2009 housing report, and there are few surprises.  Most of the fall in housing values is now being driven by foreclosure sales.  The Case-Shiller home price index for Cleveland has plummeted more than 28 percent from its peak to Q1 2009, for instance, but was down just 6 percent, excluding foreclosed sales.

Also, deep cuts in new home construction have erased the oversupply of new housing relative to long-term demand.  There is now an undersupply of 100,000 to 500,000 units, as the graph shows, which is masked by the weak economy that is slowing household formation and second home demand below its long-term potential.

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Existing-home sales have also increased, and inventory levels declined.  Year-over year inventories have fallen 36 percent since their highs.

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The key to future demand will be household formation.  And echo boomers, children of the baby boomers, have 5 million more members than their parents, said the report.  This should raise household formation to as high as 14.8 million from 2010-2020, vs. the current projection of 12.5 million households.

Immigrants will also add to the total with minorities fuelling 73 percent of household growth from 2010-20, according to Harvard’s study.   This may keep median incomes from increasing over that decade.

But affordability is way up, with 55 million, or half of all U.S. households, now able to afford a median priced home of $200,000, compared with 38.4 million households just 2 years ago, according to the National Association of Home Builders.

The question of price stabilization will only be answered when foreclosure rates stabilize.  That is just now beginning to happen.  Realtytrac reported a 14 percent increase in foreclosure filings in the second quarter.  But less than half of the filings are foreclosed upon, as borrowers negotiate with their lenders.

California, Florida, Arizona, and Nevada lead the way in foreclosures, where 50 percent declines in value are common.  But the good news is that sales are up 117 percent in Nevada over last year; 81 percent in California; 50 percent in Arizona, and 25 percent in Florida.  These 4 states accounted for one out of four sales nationally in the first quarter, according to the National Association of Realtors.

So with sales stabilizing, the next step will be housing values.  But history tells us that inventory-to-sales ratios have to decline from a 9-month supply to at least 6 months, before supply begins to equal demand.  Though demand may also pick up, if the unemployment rate stabilizes.

In fact, historical studies show that housing prices stop falling when the unemployment rate peaks.  This is because workers may no longer feel they are going to lose their jobs, and so are willing to take advantage of low prices and low mortgage rates.  And the consensus is that unemployment should top out by the end of this year.

Harlan Green © 2009