Housing Prices Mark Worst Decline in Sixteen Years

by: Markham Lee

Real estate prices declined in July by the greatest margin in sixteen years, according the latest data from the Case-Shiller home price index.

AP via Yahoo News:

The decline in U.S. home prices accelerated nationwide in July, posting the steepest drop in 16 years, according to the S&P/Case-Shiller home price index released Tuesday.

Home prices have fallen by more every month since the beginning of the year

A broader index of 20 cities fell 3.9 percent in July over last year, with 15 of 20 cities reporting that prices fell.

The five cities where prices are still rising -- Atlanta, Charlotte, N.C., Dallas, Portland and Seattle -- have reported growth is slowing in the past year. Atlanta and Dallas are close to moving into negative territory, S&P said.

Additionally, the number of homes sold in August was at a five year low, with the inventory of unsold homes at an all time high of 4.58 million.

AP via Yahoo News:

Sales of existing homes, depressed by turmoil in credit markets, fell for a sixth straight month in August, pushing activity to the lowest point in five years.

The National Association of Realtors said that sales of existing single-family homes dropped by 4.3 percent in August, compared to July. Sales at a seasonally adjusted annual rate dropped to 5.5 million units, the slowest pace since August 2002.


Sales were down in all parts of the country in August. The West saw the biggest drop, a decline of 9.8 percent, followed by declines of 5.2 percent in the Midwest, 2.7 percent in the South and 2 percent in the Northeast.

The fall in sales pushed the inventory of unsold homes to a record 4.58 million in August. That means it would take 10 months to exhaust the inventory of homes on the market at the August sales pace, also a record figure.

Out of all the data points provided, the most significant one (in my opinion), is the inventory number because it’s at an all time high, and housing prices will continue to decline as long as inventories continue to grow, until the situation stabilizes and the trend reverses. I could write a veritable novel on why housing inventories will continue to grow well into 2008, citing ARM resets, stricter lending standards, rising foreclosure rates, etc, but there is one factoid from the real estate boom that arguably trumps all others: 25-33% of all homes purchased during the real estate boom were purchased by speculators.

The downturn in housing, stricter credit standards, etc, has effectively removed the speculators from the market. How can inventories do anything but continue to grow, now that somewhere between 25-33% of potential home buyers are effectively out of the market? Granted, there will always be some level of real estate speculation, but we’re not going to see 25-33% any time soon. The other side of high levels of speculation is that it inflates the expectations of homebuilders who are now effectively building homes to meet speculation demand; furthermore, it inflates the expectations of your typical home buyer who becomes more willing to pay a premium for the family home if he/she believes an outsized return will be their reward for overspending on a house.

Based on the speculation factor alone, the only logical conclusion is that housing inventories should continue to grow and prices continue to decline, well into 2008 and perhaps even into 2009. Factor in tighter credit standards, fewer subprime homebuyers, and a reduction in the usage of “exotic mortgages”, and the argument gets even stronger.

It will be interesting to watch this situation unfold, because in many ways the minds of the market analysts, economists, etc, are still stuck in 2003 – 2005 reality with respect to the real estate market, as a result, all of the ramifications of the downturn and what it means for housing prices long-term (not to mention retail spending), haven’t been sufficiently grokked by all.


· AP News via Yahoo: “S&P: US Home Price Decline Accelerates: U.S. Homes Post Steepest Price Drop in 16 Years” – September 25, 2007

· AP News via Yahoo: “Existing Home Sales Down: Existing Home Sales Drop for Sixth Month in August to Slowest Pace Since 2002” – September 25, 2007

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