Home Price Indexes Showing No Signs of Recovery

S&P's recent home price data indicates the continuation of bleak conditions in the real estate market. With May 2007 data available, the S&P Case-Shiller Home Price Indexes marked their 18th consecutive decline in annual growth rate; the trend has persisted since December 2005.

The index family tracks the average price of single-family homes in 20 metropolitan areas and excludes new construction and condominiums or co-ops. In addition to the individual metro indexes, the family also includes a 10- and 20-city composite. The indexes are calculated on a monthly basis.

The 10-City Composite's annual decline of 3.4% for May is at levels of steepness not seen since 1991, according to S&P, while the 20-City Composite was down 2.8%. Fifteen of the 20 metro areas experienced year-over-year declines in existing home prices for May. Of the five areas that saw increasing prices, among the most dramatic were Portland (up 5.7%) and Seattle (up a fairly dazzling 9.1%) in the Pacific Northwest. In the South, Atlanta was up a robust 7.0%, while Charlotte was up 1.7% and Dallas was up 1.8%. The most hard-hit areas include Detroit (down a whopping 11.1%), San Diego (down 7.0%), Tampa (down 6.7%), Washington (down 6.3%) and Phoenix (down 5.5%).

"At a national level, declines in annual home price returns are showing no signs of a slowdown or turnaround. Year-over-year price returns are continuing to either move deeper into negative territory or experience persistent diminishing returns," said Robert J. Shiller, the chief economist at MacroMarkets LLC, in a statement.

The case is slightly less grim for the month-to-month change in annual growth rates for May versus April 2007. The number of metro areas experiencing positive annual growth in home prices increased to eight from one or two in previous months.

A report from Wachovia Economics Group from June 25 by Economic Analyst Adam York says that existing home sales were at 5.99 million for May 2007, down from 6.01 million in April. At the same time, the months' supply of existing homes rose to a 15-year high of 8.7 months. On a positive note, York noted that the declining prices and increasing affordability could provide opportunities for would-be buyers to enter the market, which could slow home prices' downward trend by the end of the year. How's that for logic...

At the National Association of Realtors, Senior Economist Lawrence Yun attributed much of the decline in May to psychological factors and a crackdown on subprime lending. He also noted that household formation had slowed, with more people returning to live with their parents or taking on roommates. In his opinion, the housing market is underperforming given other economic factors. But then again, this is the National Association of Realtors, we're talking about. (The idea that falling real estate prices in Detroit can be blamed on twenty-somethings moving in with their parents is ... interesting.)

Certainly, the subprime mortgage meltdown has a good bit to do with the slump in home prices. For one thing, there's been a crackdown on the issuance of sub-prime and even marginally prime loans and more intense scrutiny of potential borrowers, meaning would-be buyers with poor credit ratings are now unable to get the financing that would allow them to buy homes. Tightness in the jumbo loan market isn't helping either.

But that's not all: foreclosures were up 30% over the last six months of 2006 and more than 55% from the first half of 2006, increasing both supply and nervousness in the market.

Until there is some perceived resolution to the subprime lending debacle, it seems unlikely the housing market will experience a full-blown turnaround. Should the subprime problem spread any further through the economy-it was still rattling the stock market today and has sucked in some of the nation's largest banks-that, too, could have a negative effect on housing.

Given the events in the past couple of months, it doesn't seem like the readings for the S&P Case Shiller indexes will improve significantly for June.