Bouncing Between Floors? Globally, House Prices are Up and Down

House prices still bouncing along the bottom in many countries

Policymakers in Asia taking measures to cool housing markets in their countries

Problems in housing markets slowing economic recovery

While house prices have rebounded in many countries from a year ago, in just as many prices continue to fall or are only gradually stabilizing (see Chart 1). In a few countries, including the United States, there are concerns of a “double dip” in the housing market.

“Double dip” in U.S. housing markets?

In the United States and the United Kingdom, tax measures temporarily increased housing activity, but demand fell and prices receded after the recent expiration of these incentives.

In the United States, the limited success of mortgage modification programs and the shadow inventory from foreclosures and delinquencies has renewed fears of a “double dip” in its real estate market. How large is the shadow inventory? Adding together the number of homes already in foreclosure, those at risk of foreclosure because owners have been in default for 60 days or more, and possible strategic defaults if house prices decline, the shadow inventory of houses for sale may reach 7 million. This is ten times the historical absorption rate of 700,000 units a year in the U.S. housing market.

There are other problems. Delinquency rates on commercial mortgage-backed securities have recently reached record highs, and considerable amounts of commercial real estate debt will become due over the next few years. Resets on adjustable-rate loans loom on the horizon. And problems in the housing market and the labor market are intertwined: U.S. states where the house price bust was more pronounced are also where employment has fallen the most (see Chart 2). This reflects the importance of the construction sector in many states, as well as workers’ reduced ability to move to other states when the equity values of their homes have taken a hit.

That said, house prices in the United States and other advanced countries have already undergone substantial corrections since 2008. So in most countries, house prices have moved much closer to their economic fundamentals (see Chart 3). Our econometric estimates indicate that if the remaining adjustment were to happen over five years, house prices would fall modestly—an average annual rate of between 0.5 percent and 1.5 percent.

Rebound in Asia-Pacific?

Several economies in the Asia-Pacific region, Canada, and most Scandinavian...