Wednesday, 27 February 2008

Case-Shiller Home Prices Plunge..... Again

The Case Shiller Home Price Index declines continue to accelerate to the downside according to the latest data for the month of December 2007. Year over year declines have now reached a record -9.8% for the 10 City composite whilst the year over year decline in the 20 city composite plunged to a new low of -9.1%. From S&P;

Data through December 2007, released today by Standard & Poor’s for its S&P/Case-Shiller® Home Price Indices, the leading measure of U.S. home prices, show broad based declines in the prices of existing single family homes across the United States, marking 2007 as a full year of declining home prices.

The decline in the S&P/Case-Shiller® U.S. National Home Price Index -- which covers all nine U.S. census divisions -- neared double digits, posting -8.9% versus the 4th quarter of 2006, the largest decline in the series 20-year history. During the 1990-91 housing recession the annual rate bottomed at -2.8%. The 10-City Composite also set a new record, with an annual decline of 9.8%. In December, the 20-City Composite recorded an annual decline of 9.1%.

"We reached a somber year-end for the housing market in 2007," says Robert J. Shiller, Professor at Yale University and Chief Economist at MacroMarkets LLC. "Home prices across the nation and in most metro areas are significantly lower than where they were a year ago. Wherever you look things look bleak, with 17 of the 20 metro areas reporting annual declines and the remaining three reporting flat or moderate growth rates. Looking closely at these negative returns, you will see that 14 of the metro areas are also reporting record lows and eight are in double digit decline. The monthly data paint a similar picture, with all metro areas now reporting at least four consecutive negative monthly returns."

From their peak the 10 city index is off -11.4% whilst the 20 city index is off -10.5%. Before we get carried away with these historic declines, it is important to remember the heights from which prices have fallen.

As you can see above, house prices shot up hugely from the start of this decade to the peak in mid 2006. Americans who bought houses prior to March 2005 are still probably in the green, however that won't last much longer. As prices continue to decline more and more homeowners will find themselves in the red.

Some economists are predicting that house prices will fall between -20% -30%. A -20% fall would bring the 10 city index down to a level of about 180. or equivalent to prices last seen in 2004. A 30% fall in the 10 city index would imply a level of 158 or prices last seen in November 2003.

You can see on the graph above that an index level of 158 is still a little more than half way up that steep increase that started about a decade ago. Thus there is no reason why house prices can't fall more than 30%.

Whilst the market seems to have become accustomed to poor housing data I doubt they have discounted a slow decline in house prices in excess of -30% from the peak for the next 2 - 3 years. As homeowners come to grips with the reality that their homes are not and never were worth what they paid for them, they will, in increasing numbers, bite the bullet and lower their prices.