I think most people still buy into the argument that housing goes up in value over the long run and that price declines are to be bought. That fact of the matter is that if you look at housing prices since 1891, prices have gone up nominally around 3% per annum, or roughly in line with inflation. Net-net in real terms, housing has not increased in value (you can use google to source the data).
The current housing bubble and subsequent "pop" can be traced back to roughly 1991 and occurred in two-stages. The first stage of the housing bubble was fueled by the Fed taking interest rates from historic highs back in 1980 to historic lows still being plumbed today. When I started as a junk bond trader back in 1991, the yield on the 10-yr bond was around 8%. Today it is flirting with going below 4%. The Fed was able to engineer an increase in real estate by significantly lowering the cost of financing a home.
The second stage of the housing bubble, and the one which proved to be housing's demise, was the Fed and the Government in tandem proliferating the widespread expansion and use of credit. By 2005, there was so much fraud and abuse in the mortgage system, that there's actually accounts in which people were using their dog's name to get a mortgage and buy investment homes and criminals buying a portfolio of investment homes from prison cells (true stories). The Fed used this fraudulent increase in housing values to fuel all kinds of consumption-based economic expansion and the result was complete destabilization of the financial system, culminating with the de facto collapse of the banking system in September 2008.
So what now? The Fed is out of the gun powder it used to inflate the housing market from 1991 - 2007. Short term interest rates are essentially negative (on an inflation-adjusted basis) so rates can not go any lower, mortgage rates hit new record lows almost on a daily basis and still fail to stimulate new buying, and the reckless, fraudulent use of credit has been severely curtailed, though not eliminated entirely. If you take away these two factors, what dynamic can possibly keep housing prices from falling futher?
The myth out there is that the consumer is deleveraging. Does this look like that's a fact?:
Once you remove the two extremely artificial, unsustainable stimulative tools of lower interest rates and unlimited credit, the two real economic components which drive price are supply and demand. Let's examine those.
Demand. Now that the taxpayer subsidy of home buying as expired, the demand for housing has literally dropped off of a cliff. Contracts on new homes hit an all-time low in May and hit an all-time low for June as reported yesterday (this data goes back to 1963, so you can see how extreme these numbers are). Existing home sales are also hitting record lows. What can possibly stimulate demand? The job market continues to contract, unless you include the public workers who are standing around watching other workers dig up our roads, clog traffic and build sidewalks to nowhere. But they already likely own homes or do not have the credit scores rquired to finance a home. So I don't see rising income and employment as a contributing factor. Anyone else have any ideas?
Supply. Although I don't know why, new homebuilders continue to build new homes. Of course, the last thing this market needs is a new sources of supply. The existing home base is in the process of being puked back onto the market in the form of "strategic" defaults - otherwise known as "jingle mail" - in which the underwater homeowner turns his keys into the bank; rapidly rising levels of bank and GSE-repossessed homes (REO inventory); rapidly rising levels of delinquent and in-default homeowners; growing numbers of "shadow" sellers who would like to sell their home but see the equivalent home across the street on the market for a lower price than the would-be seller is hoping to get.
Here's some proof:
14% Of Mortgages In Foreclosure OR Delinquent
Strategic Defaults Rising
Jumbo Mortgage Delinquencies 50% Higher Than Average
S&P Expects 70% Re-default Rate On Modified Mortgages
Foreclosure Supply Grows Pushing Prices Lower
More On Supply. Here's a chart that I find really interesting. The source is cited on the chart: