UBS joins the housing bears [The Real Estate Economy]

UBS Securities joined Economy.com and others today in forecasting that in 2007 the U.S. will likely experience the first decline since the Great Depression in nominal national house prices. The UBS analysts are worth listening to — they came reasonably close in estimating the last quarter’s GDP number, for example. In their forecast today, housing analyst Maury Harris uses the inventory of vacant homes sitting on the market as a leading indicator for sales volume and price.

He concludes that the peak-to-trough decline in existing home sales will be 10 percent. Then . . .

The actual vacancy rate has risen to 2.5 percent from a range of 1.4 percent to 1.8 percent over the last two decades. The chart shows the four-quarter rate of change, which has reached 32 percent, near the 33.3 percent peak reached in 1958.

Harris says that in the past, excess housing inventories have been cleared as home prices increase more slowly than the rate of inflation. That may not be enough to do the job in the current environment, with consumer price inflation outside of shelter costs rising at about a 2 percent annual rate, Harris writes. “Low inflation means nominal home prices must decline more to achieve the real price cuts necessary to eventually clear excess inventories.”

Original post by noemail@noemail.org (noemail@noemail.org (Paul Kaihla)