Housing Prices To Fall Another 25%?

In a CNBC interview today, banking analyst Meredith Whitney cautioned that home prices could drop another 25%. Her argument is based upon the fact that unemployment, currently at 10%, is now driving foreclosures and she doesn’t see it getting any better any time soon.

Meredith Whitney is a force to be reckoned with because she accurately predicted problems at Citigroup in October 2007, long before anyone else did. However, her current prediction seems a bit pessimistic even for me – and I’ve been a die hard housing bear.

Let’s start by looking at where Chicago housing prices have been. The graph below plots the Case Shiller index for Chicago (blue line) along side a trend line (red). That trend line was conservatively based upon the first 12 years of the historic data. As you can see the bubble took off in early 1999 and has actually dipped below the trend line in the last 6 months. In fact, we are currently 9% below the trend! On this basis Chicago homes are a bargain and not likely to drop much more. Also note that the index has turned up in the last couple of months.

Chicago Case Shiller Index

Furthermore, let’s look at what trading in the Macroshares Major Metro Housing Up Shares is telling us about the future direction of housing prices. As of today this instrument is implying an 8.35% price increase between today and August 2014. OK…so in theory housing prices could still drop 25% in the short run and still end up 8.35% higher than they are now – but that’s a stretch.

One other thing to consider is that with all the money that has been pumped into the system over the last year or so we could be heading for some serious inflation. We’re already seeing the dollar drop and oil and gold prices surging. When inflation hits you want to be owning non-financial assets and owe lots of money that you can pay back with cheaper dollars.

Hmmm. Have I turned into a housing bull? I really don’t like sounding like all the other realtors but I have to call it like I see it.

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