Why Home Prices Are Falling Beyond Bubble Capitals

There was a time when the housing collapse narrative described a handful of way overinflated markets pulling down all home prices somewhat, but those particular locations felt most of the pain. That's no longer quite right: home prices have declined in cities beyond Florida, California, Nevada, and Arizona. Recently, other locations have begun seeing bigger home value drops than the usual suspects. What's changed?

In a New York Times article today, David Streitfeld explains the shift:

The bubble markets, where builders, buyers and banks ran wild, began falling first, economists say, so they are close to the end of the cycle and in some cases on their way back up. Nearly everyone else still has another season of pain.

"When I go out and talk to people around town, they say, 'Wow, I thought we were going to have a 12 percent correction and call it a day,' " said Stan Humphries, chief economist for the housing site Zillow, which is based in Seattle. "But this thing just keeps on going."

This can be mostly explained in a word: unemployment. Although wacky and subprime mortgage products were responsible for the early foreclosures, severe joblessness began to take over as the driving factor for struggling homeowners in 2009. Since the unemployment rate remains stubbornly high, those who own a home but have lost their income are increasingly having trouble paying their mortgages.

This much is clear to anyone who has been following foreclosure activity for the past few years. In 2010, compared to 2009, some bubble states saw declining foreclosure activity, while some others who have been struggling with high unemployment have experienced foreclosure growth. In fact, most of the subprime foreclosures occurred relatively early on, so what we're seeing now is more driven by the tough economy.

And that extends beyond just unemployment. As banks have tightened their underwriting and potential buyers have decided to exit the market for the time being due to economic nervousness, sales have plummeted over the past year. The supply of for-sale homes in areas less fazed by the housing bubble began to grow due to lackluster sales, and downward pressure on prices has resulted.

This economic recovery will have to occur in spite of the housing market, rather than because of it. Until unemployment declines and consumer sentiment improves considerably, home sales should remain quite low and supply should remain relatively high. That means falling home prices will be more common than rising prices for the time being. But once the broader economy turns around, the areas that saw their home inventory increase by fewer homes will fare better than those where inventories swelled. And that should translate into an easier home price recovery for those locations more distant from the housing bubble and a more difficult price recovery for those at its center.