Krugman, NY Times: Home Prices Have Plenty of Room on the Downside

Home prices need to fall substantially to bring them into alignment with incomes, writes Paul Krugman for The New York Times (12/14/07). This process will jeopardize an enormous number of homeowners and lenders alike:

After the Money’s Gone

To restore a historically normal ratio of housing prices to rents or incomes, average home prices would have to fall about 30 percent from their current levels…

As home prices come back down to earth, many of these borrowers will find themselves with negative equity — owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.

And the numbers are huge. The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity. If prices fall 30 percent, that number would rise to more than 20 million…

How will it all end? Markets won’t start functioning normally until investors are reasonably sure that they know where the bodies — I mean, the bad debts — are buried. And that probably won’t happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.

See also:

Financial Week: “Lennar dumps 11,000 home sites for 40 cents on dollar” (12/3/07)
Lennar, one of the nation’s largest home builders, unloaded 11,000 home sites for 40 cents on the dollar into a new land-development venture it formed last week with Morgan Stanley Real Estate—raising questions, perhaps, about the true value of the remaining $5 billion in inventory on its books.

Lennar sold a portfolio of undeveloped land as well as partially and fully developed home sites for $525 million, which it had valued on its books at $1.3 billion as of Sept. 30. The land consists of properties in 32 communities from California to Massachusetts.

Republican: Florence condo units sold at half-price (12/4/07)

CNNMoney: “Home prices: Worst drop since ’70” (11/29/07)

Gazette: “Foreclosure deeds double in area counties” (12/6/07)

AP: “Empty Houses Home to Crime As Loans Fail” (11/13/07)

House prices to drop much lower: Greenspan (9/19/07)