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Zillow’s Humphries: “Encouraging News” on the “Long, Rocky” Road to a Housing Bottom

Aaron Task
·Editor in Chief

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Later today, the Fed is expected to launch "Operation Twist" and possibly other policies designed to stabilize the housing market.

Ahead of the FOMC meeting comes data suggesting the housing market may actually be working itself out, albeit not fast enough for most Americans and certainly not for elected officials.

On Wednesday, the National Association of Realtors reported existing home sales rose 7.7% in August to a 5.03 million annualized rate, the most since March. Other highlights from the report:

  • The inventory of homes for sale fell to an 8.5% month supply vs. 9 months in July.

  • 31% of sales were of "distressed" properties, while investors accounted for 22% of total sales vs. 32% of first-time homebuyers.

  • The median U.S. home price fell another 5.1% to $168,300.

The August existing home sales data is "encouraging news," says Stan Humphries, chief economist at Zillow, especially given the grim macro economic outlook, featuring tumbling stock market, S&P's downgrade of the U.S. credit rating and the debt ceiling debate in Washington.

In combination with Tuesday's report on housing starts and permits, which showed overall weakness but notable strength in multi-family units, you can paint a picture of a market in "transition," Humphries says.

"What's happening is we're converting a lot of owner-occupied housing stock into renter-occupied stock…and the multi-family sector is growing to service new demand," he explains. "We're seeing strong movement [of] investors moving in to arbitrage distressed owner-occupied stock and convert into rental stock where there's high demand."

If current trends continue, rental prices will eventually rise so high that home buying will become attractive again to more Americans; at that point, the housing market can finally establish a bottom.

The problem, as noted above, is that can't come fast enough for struggling homeowners, politicians and policymakers who believe they can't leave the market to its own devices.

A new survey from MacroMarkets predicts U.S. home prices will decline 2.5% this year and rise just 1.1% annually through 2015. Humphries is a bit more skeptical, predicting prices will fall 3% to 5% this year before bottoming in 2012 at the earliest.

"We think it's going to be a long, rocky bottom where appreciation will be below historic norms," he continues, predicting gains of just 1% to 2% for the two-to-four year period after real estate final bottoms out.

By his own admission, Humphries' forecast is "not particularly rosy."

Presumably, Ben Bernanke & Co. share a similar view which is why they'll like try again today to lower long-term rates even if, this not a "rate-driven environment," as Humphries says.

If "Operation Twist" helps spur economic activity and jobs growth that will definitely give housing a boost, but just "pushing rates lower is not going to help," he says.

Sometimes time is the only thing that heals what wounds us.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com