Housing Recovery Hinges on Household-Formation Gain, Case Says

U.S. home prices won’t recover until the economy improves enough to boost the number of households and clear an oversupply of properties, said economist Karl Case, co-founder of the S&P/Case-Shiller home price index.

“Normally, the way we’ve cleared the market is we’ve had more household formation,” Case, a retired Wellesley College professor, said in an interview today with Tom Keene and Ken Prewitt on Bloomberg Radio’s “Surveillance.” Lackluster economic growth has encouraged people to move in with friends or family, meaning “demand is not going anywhere,” he said.

The number of U.S. households, a key determinant in home sales, grew by 600,000 this year, less than half the 1.5 million pace of 2006, when prices reached a record, according to IHS Global Insight Inc. This year’s pace isn’t enough to absorb the so-called shadow inventory of distressed properties poised to come on the market, said Patrick Newport, an economist with the Lexington, Massachusetts-based research firm.

About 6.4 million loans were either delinquent or in default in September, according to Lender Processing Services Inc. in Jacksonville, Florida. There were 2.2 million homes in the process of being repossessed by lenders.

“Foreclosures are driving price declines, and when you add a high unemployment rate to the mix, it’s a recipe for an additional 5 to 10 percent price drop,” Newport said. “People who lose their jobs are more likely to lose their homes later.”

Unemployment at 9%

The U.S. unemployment rate was 9 percent in October, the 30th consecutive month at that level or above, with the exception of dips in February and March, according to the Bureau of Labor Statistics. Measured quarterly, the rate probably won’t begin to decline until mid-2012, according to a Bloomberg survey of 60 economists.

Economic expansion won’t make a dent in the unemployment rate until growth surpasses 2.5 percent, Newport said. That’s not likely to happen until the end of 2012, according to the Bloomberg survey.

Residential real estate prices in 20 U.S. cities fell 3.6 percent in September from a year earlier, the Case-Shiller index showed today. That was bigger than economists’ projection for a 3 percent decline, according to the median of 32 estimates in a Bloomberg survey. A separate gauge from the Federal Housing Finance Agency, which measures homes backed by Fannie Mae and Freddie Mac, fell 2.2 percent in September.

The Case-Shiller index reached a record in July 2006 after almost doubling in six years. It tumbled 33 percent from its peak to a March low that put homes at 2003 prices. September’s reading is 3.1 percent above the March level.

“It’s hard to see what it’s going to take” to turn housing around, Case said.

To contact the reporter on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net.

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