Debate Rages about Real Estate's Future

Such prominent analysts as Meredith Whitney are raising alarms about the prospect of a deepening slump despite recent signs of improvement in home sales, prices, construction, and inventory levels.

Just as optimists see signs of life in the market, it’s just as easy to point to the danger signs.

As my colleague Chris Palmeri wrote yesterday, even though total housing starts, including apartments, rose slightly last month, single-family home starts, which make up most of the market, actually fell for the first time since January. The Mortgage Bankers Association’s index of loan applications for the week ending Sept. 11 dropped 8.6% on a seasonally-adjusted basis.

And the widely watched S&P/Case-Shiller 20-city home price index, which cheered Wall Street with its back-to-back increases in May and June — the first month-over-month jumps since 2006 — only seemed to spark more debate.

Daniel Alpert, Managing Partner at Manhattan boutique investment bank Westwood Capital, says that home prices could fall another 14% by the time the slump is over.

To understand why, it helps to divide the metros into two separate categories, rather than to lump all of them together, he argues. According to his analysis, home prices in 13 of the 20 metros included in the Case Shiller index could continue to drop: Denver, Washington D.C., Atlanta, Chicago, Boston, Detroit, Minneapolis, Charlotte, New York, Cleveland, Portland, Texas and Seattle. The former bubble markets where prices fell early and fast are likely closer to the bottom, he said. They are: Phoenix, Los Angeles, San Diego, San Francisco, Miami, Tampa, and Las Vegas.

In the seven bubble markets, where foreclosures have already pulled down prices to attractive levels, sales soared 29% in the second quarter compared to the same period last year. On the other hand, home sales in the 13 metros, which saw neither huge price runups during the boom nor massive declines afterward, dropped 22%.

Home prices across the country were artificially boosted during the boom by creative mortgage products and easy credit. And now prices in markets such as New York and Seattle need to fall some more to reach historic affordability levels, he said.

“It was very easy to look at housing crisis nationally for two years,” Alpert said. “The housing crisis — at first —looked like it was everywhere. As it bottomed out, you have to look at individual markets again.”