Home Price Decline Slows, But Continues to Fall

By Dirk van Dijk

The April Case/Schiller Index shows that the decline in housing prices is not over yet. The best that can be said is that the rate of decline is slowing.

On a seasonally adjusted basis, the 10-city composite index fell to 151.27, a decline of almost 1.0% from March. On an annualized basis, this is an 11.6% rate of decline. On a year-over-year basis prices are down 18.0%, so the rate of decline was lower in April than earlier in the year, but prices falling at an 11.6% rate hardly seems like a green shoot to me.

The data on the 20-city composite was very similar with a 0.9% monthly decline and a 18.1% year-over-year drop. From the May 2006 peak housing prices are down 33.1% based on the 10-city index and off 32.0% based on the 20-city index.

The graph below (from http://www.calculatedriskblog.com/) shows the monthly rate of change in the 10-city index (annualized) back to the start of its history.

April looks good relative to the prior 6 months when prices were falling at more than a 20% annualized rate. It is still a faster rate of decline than the worst months of the early 1990s downturn, which also was in large part caused by housing finance problems (S&L Crisis).

As the Freddie Mac (FRE) presentation pointed out yesterday (see Foreclosure Waters Rising Fast), 17% of all homeowners (well, those that have mortgages that Freddie is involved with) owe more on their homes than they are currently worth. An additional 11% have less than 10% equity. Even this much improved rate of decline in April would mean that by the end of the year, most of that 11% would be underwater as well.

The people who are already slightly underwater would be pushed to the point where not ruthlessly defaulting becomes not a mark of honesty and integrity, but of stupidity. It is one thing to stick it out and continue to pay on your mortgage if you house is worth $5,000 less than your mortgage. You signed a contract and you want to honor your commitments. You have ties to that community, and you value your credit rating.

However, when the mortgage is $50,000 or $100,000 more than the house is worth...lets just say everything has its price. Add in loss of income from hours being cut or one or both earners being laid off, and defaults and foreclosures are bound to continue to rise. This means that the pressure on the mortgage related companies, including but not limited to the mortgage insurance companies like MGIC (MTG) and the banks like Bank of America (BAC) is not going to let up any time soon.

Even for those that still have substantial equity in their houses, this is a significant loss of wealth for them. For most people, home equity is (or was) a far more important part of their wealth than the stock market.

For years, the housing ATM was a very important source of liquidity to tide people over in rough times. Those days are gone. People are going to have to rebuild their wealth the old fashioned way, by spending less than they earn. We have seen the savings rate shoot up dramatically so far in 2009, but it will have to rise further and stay high for a very long time. This means there will be no big snap back in consumer spending.

While we may get a short term snap back in economic growth from the stimulus spending and from inventory restocking, it will be very anemic and we will fell like we are in a recession for a very long time to come.

Comments

[ain't no fo...:]

Thanks Dirk, that pretty well sums it up.

We talk about the collapsing capacity utilization numbers and many think immediately of the industrial and manufacturing side of things. But we have the same degree of slack across virtually all segments of the economy - many more homes for sale than qualified buyers, BAC, C, WFC and Wachovia branch offices on virtually every corner of the intersection in most parts of FL (and most usually empty of customers, with one teller and one branch manager playing PC solitaire), ditto with the fast food joints, and tire/oil change outfits, strip malls slowly bleeding off tenants, and on and on.

I will take a leap of faith and state that those conditions prevail in many other areas of America, especially NV, AZ, CA, all the other hot spots.

That all represents "capacity" that is not now and for a long time to come going to be utilized, but is right now (but for how much longer) being paid down - as demand for all this excess capacity causes it to slowly get closed down, more jobs are lost, more credit cards, car loans, mortgages default and everything swirls around the bowl a little bit faster.

I still haven't heard anybody come up with more than extremely expensive cosmetic and short term solutions to stop the bleeding.

Jul 01 03:13 PM

[whidbey:]

Utter wisdom. The recession is based on structural deficits that will not be closed by revenues for years, if ever.

The end game is easy, either the US defaults or inflates away the debt.

Neither is good, and both are terrible. It could be helped (lightened) if the Administration did not keep "spending to save a lot more", which is pure nonsense, but as long we buy the sort of faff it will be served with a straight face. Fight it! it is your future.

Jul 01 03:48 PM

[John Lounsbury:]

Dirk - - -

Nice summary and analysis. I am trying to update my research on the state of the housing market and I'm having trouble surveying the swamp because of all the alligators: increasing unemployment and decreasing hours per week, mortgage reset overhangs in 2010 and 2011, the reported (rumored?) foreclosure holdbacks by banks that have yet to be added to inventory, the burden of temporary rental properties that would be for sale in a more normal market, incipient second home inventory just waiting for a glimmer of hope that sales volumes might return in the resort/vacation market, etc.

There are some cheerleaders declaring a housing market bottom has arrived. It appears to me that they are not cheering for a winning team.

Jul 02 11:58 AM

[Ted Hurlbut:]

I believe we're in a bottoming phase overall, but the housing market is likely to be a drag on any recovery. There's still too much inventory and unemployment is driving fresh foreeclosures. Housing may have led us into this, but it's not going to lead us out. And the anticipated problems in the commercial real estate market will only increase the headwind.

Jul 02 03:57 PM