A special team of economists using a variety of forecasting models have concluded that any future declines in housing prices will likely remain small. The economists include professors from Columbia University and the Center for Real Estate at Wichita State University, Kansas.

What led them to this conclusion?

The housing price index of Standard & Poor’s/Case-Shiller gave some extreme figures, but the economists called this index faulty as it excluded data from 13 states and only gave partial coverage of 29 others. Therefore, an accurate reflection of middle-market home ownership could not be obtained using their model.

They determined that the house price index of the Office of Federal Housing Enterprise (OFHEO) is most realistic of all the available models. OFHEO’s data shows only four states that have had pricing declines of more than 4 percent over the past year. Using a model based on OFHEO’s price index, foreclosures and home sales, permits and employment information and current economic data, the economic team concluded that predictions of further large housing price declines are greatly overblown.

“Our analysis reveals, unsurprisingly, that foreclosures and home prices have negative effects on each other over time, but this does not imply a vicious cycle of collapsing prices. Our models predict that as foreclosures continue to climb in many states, house prices will remain flat or decline in those states - but will not collapse.

“One reason for this is that the effect of foreclosure shocks on real estate house prices is small. Furthermore, other fundamental factors (such as employment growth and a slowing of the growth of the housing supply over the past year and a half) will cushion the impact of foreclosures,” the economic team said.

What does this mean for you?

We are still in a real estate buyer’s market nationally. Declines in prices are likely to be fairly insignificant and interest rates are still low but expected to rise in the next year. There is a large inventory of homes on the real estate market, giving home buyer’s a lot of choices. Now may be the perfect time to purchase the house of your dreams in sunny Naples, Florida.

Source: The Washington Post, Charles W. Calomiris, Stanley D. Longhofer and William Miles