Prakash Loungani: Home Prices Still Have Far To Fall ...

WASHINGTON (Dow Jones)--Dour predictions about the housing market aren't the norm anymore, as many economists have grown optimistic that home prices will begin rebounding strongly next year.

But International Monetary Fund economist Prakash Loungani has found plenty of reasons to remain glum.

Loungani, at a National Economists Club luncheon in Washington Thursday, presented his analysis of housing busts since 1970 in the countries that make up the Organization for Economic Cooperation and Development. His prediction: Home prices will fall much farther and for much longer.

On average, the previous housing slumps lasted 18 quarters, with prices dropping 22% from peak to trough. By contrast, the current housing slump has lasted only 14 quarters, during which prices have dropped just 15%.

But the latest boom was so much bigger than the previous ones that it's logical to anticipate an even more brutal downturn, Loungani argued. Prices rose 113% over 41 quarters, compared with 39% average price increase over 39 quarters seen in the previous booms. Loungani likened the current cycle to a rollercoaster that has roared up a steep hump and now needs to come down again.

"A lot of adjustment has taken place in house prices, so we shouldn't discount that. But it's true that we shouldn't declare victory too soon. We've now had a fresh shock from what's happening in Europe," he said after the luncheon.

Loungani marshaled other evidence that home prices are still inflated. He found that prices in OECD countries in 2009 were substantially out of whack with rents and incomes in those countries, compared to average values from 1970 to 2000. In the long run, he argued, incomes and rents will act as weights on home prices, bringing them back to earth.

Price-to-rent and price-to-income ratios were well above historical values in all OECD countries, except Japan, Germany and Switzerland, according to Loungani's analysis. New Zealand, Australia, the Netherlands and Belgium saw the biggest misalignment with historical price-to-income values, while Canada, Sweden, Norway and Australia saw the largest gaps in price-to-rent values.

Loungani said his analysis of prices and rents in U.S. metro areas suggests that many markets on the West coast and in parts of the Northeast could yet see prices plummet a further 30%-40%.

-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com

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(END) Dow Jones Newswires
May 27, 2010 16:25 ET (20:25 GMT)
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