Home Prices Down 15%

Two separate trackers of residential real estate prices confirmed what everyone knows - home prices have fallen off a cliff. First, the cheerleaders for the real estate industry, the National Association of Realtors, stated in a press release on Monday that the median price of a home had fallen to $195,900. At this level, home prices are down 15.2% from the June 2006 high of $231,000.

Now, that is a bit skewed since June happens to be the month with the highest level of home sales activity, whereas February is the second lowest. However, I am practicing age-old journalism by not allowing the facts to get in the way of a good headline!

The Case-Shiller index, which does not have an issue with seasonality, pretty much confirms the same trend. The Case-Shiller index dropped to 180.65 in January compared to a high of 206.52 in July 2006, a decline of 12.5%.

Ultimately, this is a good thing. The decline in home prices had to happen. And the more home prices fall, the closer we get to the bottom in stocks, allowing the market to move forward and build a solid foundation for the future.

I read a few articles yesterday arguing that with a pick up in sales of existing homes, the bottom is in for home prices. That may be, I don't know, though I am skeptical. However, by some estimates, home prices are still 20% over-valued, and the CEO of Freddie Mac (FRE) recently said that the decline in home prices is only one-third finished.

Home prices could work off the excessive valuation and move sideways for many years, as they did through much of the 1990s. Or home prices could turn south again.

If home prices begin to stabilize, then though we may not be at a bottom, stress in the financial system will ease, though not dissipate. But if home prices fall another 10%, then we will go through another round of mortgage write-downs, credit seizures, and significant downside in the equities markets.

I would prefer to get it out of the way, take our pain and move forward, but the tolerance for pain in financial markets seems to be as low as ever these days.

Comments

[nickgogerty]

an a historical affordability basis, they have another 10% to return to the mean of incomes.

[Orthofrancis]

Prices need to fall to the typically sustainable ratio of about 2.6-3.0 time the average salary, or 100 times rent. In California, the average household salary is 48k, so an average house should cost 150K, and not 450K. These averages have been shown to be accurate since the 1900s. We've just been in a tulip/house buying bubble frenzy.

["Magazine-Cover-Indicator"Indicator....]

on a historical affodability basis, we have more like another 25%-30% to return to the mean of incomes vs house prices.

["Magazine-Cover-Indicator"Indicator....]

eh....even seeking alpha already has the graph showing the decline to re-balance to incomes is close to 30%

seekingalpha.com:80/ar...

[kerry]

comment to ortho: everyone wants to live in cali. Prices will be at a premium. Of course real estate has a ways to go. Give that we're in the US, things will correct fairly soon. I think the executive branch and the fed have a few tricks coming.

[L.A. gal]

comment to kerry: As a Calif. native I can tell you the years of everyone wanting to live in cali have long since passed. Many people are actually leaving cali in mass exodus due to the businesses that have already left to more business friendly states. Sure cali is still desirable, and there are perks such as the great weather, local beaches and mountains. However, when companies pick up and leave the employees follow, taking the tax base with them. We are starting to see public schools close down since enrollment is down.. the parents left the state onto greener pastures, lower housing and jobs. I agree on the fed's few tricks coming... hold onto your hats folks!