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Housing Prices at 2002 Levels

When Warren Buffett called his prediction on housing from a year ago “dead wrong” in a recent shareholder newsletter, he was only stating out loud the guilt of every analyst in the industry for predicting the “bottom” too prematurely. But now, the same usual suspects are predicting a housing comeback. See if you think this looks like a comeback:

The nation’s home prices have fallen to their lowest level since 2002, according to a private report, casting a troubling shadow over what has otherwise been a brightening economic recovery.

Although analysts have been nervously eyeing rising oil prices and Europe’s struggling economy, Tuesday’s S&P/Case-Shiller index of property values report offered a sobering reminder that the still-shaky housing market remains one of the most potent threats to a robust recovery.

In December, the index fell 4 percent from a year earlier, after decreasing 3.9 percent in November. The decline was reported one day after another measure showed an encouraging increase in the number of people signing contracts to buy previously owned homes.

This, of course, means more borrowers slipped underwater in the past several months.

We’re about four years into every Mark Zandi and Mark Zandi-wannabe pointing to this or that green shoot and predicting the great housing comeback. It hasn’t happened. It’s not going to happen for some time. If anything, the rock-bottom mortgage financing rates are starting to go away out of necessity. This uptick will blunt the effectiveness of HARP refinancing when it, supposedly, comes on line in March. Anyway, that’s more of a stimulus measure than a housing policy. Another housing policy, the sale of foreclosed properties to investors, designed to remove supply, is moving extremely gingerly, and the first batch of properties up for bid aren’t even vacant, for the most part, so that does nothing to reduce supply.

There’s been no change whatsoever to unlock the private mortgage finance market, so Fannie and Freddie remain the only secondary market player willing to take on risk. Higher underwriting standards (thankfully) persist. The Administration’s programs have done more harm than good, and principal reductions from the foreclosure fraud settlement, if the banks even go that route, are many months away.

The economy has perked up, thanks to supports like the payroll tax cut that cannot go on forever, to the point that GDP sits at a relatively normal level for a non-recovery year. Call it modest growth, as Ben Bernanke did today. Of course, this is supposed to be a recovery, and when those supports eventually get kicked out – not to mention the drag on fiscal policy that begins in FY2013 – the housing market’s continued sluggishness will be a lead weight on getting the economy moving.

That’s what people overlook when they talk about the settlement. This is not just about seeking justice and relief, though that’s part of it. The systematic fraudulent activities carried out by the banks broke the largest market in the world. And nothing that has been done has healed it. Not even close.

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David Dayen

David Dayen