Have US Home Prices Reached Bottom?
In particular, US home prices in the first quarter of 2011 fell 2.5%, compared to the fourth quarter of 2010. This was the largest quarterly decline registered by the index since the fourth quarter of 2008. On an annual basis, US home prices declined 5.5% compared to the first quarter of 2010.
According to the FHFA House Price Index, seasonally adjusted house prices increased by 0.2% in April and by 0.4% in May of 2011. However, we still need to see what happened in June to conclude how the second quarter of 2011 shaped up. Note that by May 2011 the HPI had dropped 20% from its April 2007 peak.
Whatever happened in June, given the latest developments and the large uncertainty regarding the outlook of the US and EEU economies it is our opinion that it would be highly risky to conclude that house prices reached or are close to their bottom and that no further significant declines will follow in the next 24 months ahead.
Property investors acquiring houses with the aim of achieving medium-term profits, should in our opinion purchase houses at prices that allow a significant cushion against significant further declines. Furthermore, it is our opinion that property investors may be able to reduce the risk of their investments by pursuing hedging strategies/vehicles/instruments that can provide effective protection against further reduction in property values. Such hedging strategies should be carefully selected so as to provide effective downside protection for the particular properties held or considered by the investor.
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