Home prices: Not going up for five years

Sales of existing homes were up sharply in February. But don't expect that to keep up. "All those involved in the real estate market would like to say this is proof the real estate market has turned around," says Bill Hampel. "I think it's an aberration."

I was on the phone with Hampel, the chief economist of the Credit Union National Association, this morning. Credit unions make lots of home loans. But Hampel doesn't talk the perennially optimistic real estate industry talk. That's partly because he's been through real estate cycles before and partly because he thinks loose lending standards drove a lot of housing demand over the past couple of years--and those lending standards are about to get a lot tighter.

"A lot of the gimmicks that lenders have used to lower payments--deeply discounted rates, option ARMS, interest only loans--those applied to prime mortgages as well as subprime ones," Hampel says. Now most of those gimmicks are disappearing under pressure from regulators and investors, and without them fewer people will qualify for mortgages, thus reducing housing demand. (And not just, as I speculated the other day, in poor neighborhoods.) "Lenders tend to overreact to these things," Hampel says. "We go out in one direction, and then come shooting back."

That's one reason Hampel thinks home prices aren't going up anytime soon. The other is that he's been working at CUNA since 1978, and has seen how real estate downturns usually play out. The key word is slowly.

"If this were the stock market home prices would have dropped 30% and then started rising again," he says. But the housing market doesn't work like that. When demand drops, many people hold on to their homes rather than sell at a loss. So while Hampel doesn't see a "meltdown" in the offing, he doesn't see a turnaround either.

"I think that basically home prices are flat for five years," he says. "It'll take that long for them to catch up with the economy."