Massive Home Equity Losses Predicted to Continue in 2011

It has been clear since the end of the first time home buyer tax credit that the housing market is still seeking a bottom.  We predicted back in the spring that when the government stimulus program ended, home prices would resume their downward trajectory.  The only thing that was unclear was how much further prices had to fall.  Today we have a couple of pieces of news that illuminate the situation.

First up, Zillow came out with a study yesterday that stated that the United States is expected to lose $1.7 trillion worth of home equity in 2010, a 63 percent increase over the mere trillion dollars of home equity that evaporated in 2009.  Since the peak of the market in June 2006, the United States has lost $9 trillion worth of home equity.  Losses in the third and fourth quarter of 2010 will total almost $1 trillion.  Although some sections of the country actually gained value (the Boston and San Diego areas, for instance), most localities were net losers.

The second piece of news comes from real estate data provider Clear Capital.  Clear Capital estimates that as of November, housing prices are down 5.8 percent during the previous three month period.

Said Alex Villacorta, Clear Capital Senior Statistician:

“It’s encouraging that the immediate and dramatic decline in prices that we observed since mid-August appears to be softening, but any optimism should be tempered by the fact that November’s numbers show continued significant downward pressure for home prices. Nationally, prices are six percent above double-dip territory, but are down eight percent since the momentum from the tax credit ended.”

Lastly, we have a prediction about 2011 from Fitch Ratings.  Fitch is predicting that home prices will fall another 10 percent in 2011.  The agency’s negative outlook is due to the continuing foreclosure crisis, ongoing high unemployment, and the overwhelming supply of homes on the market and the relatively paltry demand for them.

As near as I can tell, the supply of available homes is the number one hurdle to a recovery in the housing market.  According to CoreLogic, there are more than 6 million unsold homes (including visible and shadow inventory).  There simply is not adequate demand to absorb these homes, and basic economics tells us that home prices must fall as a result.  Until we start putting people back to work in large numbers, this situation will not change.