RADAR LOGIC – Beware of the “Fall” of 2010 – Prices Could Fall Another 20%

FROM THE CEO: August 2010

BEWARE THE “FALL” OF 2010

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Moody’s housing economist Celia Chen has released a forecast of housing that is pretty dire. If the U.S. enters a doubledip recession, writes Chen, home prices could fall another 20% before stabilizing in early 2012. That compares to a baseline forecast that calls for another 5% decline in home prices and a bottom early next year. Chen puts the odds of a near‐term double‐dip at one in four. As observers of the actual housing market, while we cannot say these numbers are right, we certainly support Chen’s concern. However, we think the order of events will be reversed: it is our belief that housing prices will decrease in the autumn, perhaps precipitously, and that may cause a second dip in the U.S. economy. History says the summer is the time of year that we see strength in housing, both activity and prices. This makes sense given the propensity of families to move in time for the school year. So, naturally, we look for activity, and thus prices, to strengthen during the summer and then soften in the fall. This year the numbers are somewhat distorted by the effect of the legislated tax credit. Much has been said about the impact of the home buyer tax credit. Our own view is that it has not done much to help. But we do agree with the consensus view that it has probably “pulled forward” some demand. If you were going to take advantage of lower prices, it makes sense that you would do so in a manner that also got the benefit of the tax credit. So we looked at what seasonal activity would have been without this “pull through.” To keep it simple, we assumed that 15% of the activity (transaction counts) came from this accelerated demand. By backing these transactions out of the actual numbers and comparing the pro‐forma to history, we see some pretty alarming statistics.

Source: Radar Logic

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RADAR LOGIC OPINION – BEWARE THE “FALL” OF 2010

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