Case-Shiller, And Housing Dynamics

by: Markham Lee

The latest Case-Shiller numbers are in and it appears that prices are down 19% on the year, the largest fall since the index started in 2000.

(From the Financial Times*): "Single-family home prices in the 20 largest metropolitan areas dropped 2.8 per cent in January, according to Case-Shiller’s index of the 20 largest US cities, another sign that the housing market bottom may still be distant.

Nationwide home prices are down 19 per cent on the year, the largest fall since the index started in 2000. Home prices in the 10 largest metropolitan areas dropped 2.5 per cent in January, leaving them more than 30 per cent below their peak in mid-2006. Prices, which rose at roughly the rate of inflation over the first 13 years of the index, grew more than 90 per cent in real terms between 2000 and the market’s peak.

Though prices were declining faster than ever, a faint glimmer of hope can be seen in the decreasing speed of the rate of decline, said Robert Shiller, co-creator of the index and professor of economics at Yale University. But, he added, “I don’t read too much into it yet.”

The price declines were widespread, with the Las Vegas, Minneapolis, Detroit, Chicago, Tampa, and San Francisco metropolitan areas all losing more than 4 per cent.

“A lot of cities are pretty much back to where they were before the bubble began, some cities, like Detroit, are below it,” said Shiller.

Nationwide housing prices have about another 20 per cent to fall before they stabilise, said Dean Baker, co-director of the Center for Economic and Policy Research, who has been warning of an inflated housing market since 2002.

But with home prices falling at around 2 per cent a month, he said, “I think the real question is whether they overshoot.” Some markets, including Cleveland and Detroit, may already be selling at a discount, he said."

However don't take all of this to mean that the bottom is near. As I said last week, the only true sign of a bottom being reached is when the various inventory issues start to show a multi-month improvement.

It would also be wise to factor in economic issues into any analysis of housing prices, because even though Detroit's prices are currently below pre-bubble era levels, it stands to reason that the decline of the auto industry is going to cause prices to continue to fall for some time. Of course this goes for many other parts of the country, because you can't exactly generate upwards pressure on housing prices if people are losing their jobs, finding themselves underemployed and/or the economy hasn't recovered.

Between the fact that prices were overinflated in the first place, the situation around inventory, the fact that many efforts to "fight foreclosures" will only delay the inevitable, and the weakening economy, it's very likely that the housing downturn will continue for some time. At this point it's probably better to adjust one's expectations around housing, than it is to look for a bottom. Because even after the bottom is reached we're probably in for a rather extended period of stagnate to minimal appreciation.

Speaking of the inventory issue(s), here is a link to a Census Bureau's page that provides data on homeowner vacancy rates. In my view these are some of the most important data points on housing available, as they're going to drive the supply and demand dynamics that will inevitably control housing prices.

*The Financial Times: "US housing price freefall extends into January" -- Simone Baribeau, March 31, 2009.

Disclosure: At the time of publishing the author didn't own a position in any of the companies mentioned in this article.