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Home-price deflation, Round 2?

August 30, 2010 |  7:00 am

Plenty of air has come out of the housing bubble over the last three years.

But I make the case in my weekend column in the Times that the stunning collapse of home sales in July warns that prices in many places are likely headed for a further decline, after stabilizing over the last year.

The potential for another round of price deflation isn't what most homeowners, or the Obama administration, want to hear. But if the drop in mortgage rates to generational lows this summer hasn't been enough to motivate buyers, the implication is that many of them believe sellers aren't being realistic about prices -- particularly in a weakening economy.

Homeprices That theme was echoed in emails I received from a number of readers. They complained not about the cost of lower-end homes but about the prices sellers were asking for higher-end houses (where, by the way, rising foreclosures among top-tier properties are adding to supply).

A reader named Mike wrote:

We have seen many houses in Laguna Beach drop from $2,000,000 to around $1,200,000 to $1,300,000 over the last year which is a start but these places were selling for around 400k in the mid 1990's! People heading into retirement (and all the sellers are retiring -- we asked) are still looking for a lottery like payout when they sell. This isn't going to happen. The sooner people realize this and adjust their lifestyle expectations the better.
Mr. S wrote:
As long as prices continue to be propped up by [government] gimmicks, they'll never fall to a point where people will buy. My wife and I have been ready to buy a bigger home for years, but we WILL NOT DO IT until prices hit the "reality zone" again. Imagine how many legitimate buyers would enter the market if prices dropped 25 - 30 percent?
And Jerry wrote:
Many of my friends and I chose not to buy during the bubble years because we were confident the market would correct itself.  Unfortunately, none of us were able to predict massive federal government intervention to keep home prices artificially propped up. I feel as if we are now being punished for having been reasonable and prudent with our money.
Of course, buyers always want to pay less and sellers always want to charge more. The market clears wherever it is that the two sides finally meet. As buyers now dwindle in number while the supply of homes for sale continues to rise, the clearing price should drop -- unless many sellers decide to pull their houses off the market.
Some undoubtedly will do so, but as reader Mike pointed out, there is a large group of high-end sellers out there whose retirement plan is centered on cashing out of their homes.
Will they take a lower price now -- or wait, and take the chance that their house will fetch even less in 2011 or beyond?
-- Tom Petruno