US House Prices Slip Again
There was considerable doom and gloom this morning after the monthly Case-Shiller index report showed further slippage in home prices in the top twenty cities of the US. The latest figures are for October since gathering this data takes a while, and show a national dip of 1.3%, which represents a small acceleration of decline from September’s 0.8%.
Looking at the details it is immediately apparent that the downturn is national and not local. Every single one of the top twenty cities saw a decline with the least decline being in Las Vegas and Washington DC, where prices dropped only -0.2%; and the largest drop being in Atlanta at -2.9% and Detroit at -2.5%. Further, the only reason the index bounced back from its 2009 lows to the extent that it did, appears to have been a temporary recovery in the worst hit housing markets, and where the temporary first time buyer tax credit had most impact. Several other markets, such as Atlanta, Charlotte, Seattle, and Portland [Oregon], never had a break in their declines and are now at new low points.
Clearly housing remains in very weak condition. Prices will remain under pressure, with the usual local exceptions, until normal inventory levels are reached. Year over year sales are well down, by about 25%, while unsold inventories have ballooned by upwards of 50%. Throw in the turmoil surrounding foreclosures and delinquency rates on mortgages and the picture remains ugly. It is no wonder that housing starts are at thirty year lows and show little sign of recovery.
All this adds up to a continuing grim outlook. Whether the breathless talk of a threat to overall economic growth is justified is questionable. Such talk depends on an interpretation of the central role of housing in the consumer market. If a resumption of a decline in home prices puts more stress on household expenditure, as some claim, then it could undermine the general recovery. As we have just seen, consumers came out in force during the holiday selling season and pushed retail sales up at a rate not seen for years. Depressed home prices could – only could – cause this uptick in consumption to stall. It all revolves around whether the average household has now factored in a lower home price as part of its overall financial situation. If so, then as long as further price declines are not too severe, the damage will be contained. But if prices drop by a larger amount, say another 10% or so, then the depressing effect could be large enough to drain demand from an already demand deficient economy and undo much of the good work done hitherto.
I tend toward caution at the moment. I continue to argue that real estate is still overpriced. In some markets prices are still way inflated above their 2000 levels and look ripe for more decline depending on local income and other conditions. For instance, one reason New York prices declined less dramatically, and are still at 171% of their 2000 levels is, obviously, the impact of all that banker bonus money flooding the area. Whether it stays that way over the next few years depends on attitudes towards those bonuses.
In general a good rule of thumb, and that’s all it is, is that a home is worth about what it would have cost in 2003. That still leaves the bubble based inflation between 2001 and 2003 vulnerable to decline. Having said that, what wage growth we have seen since then supports some sort of price increase, but with the excessive inventory built during the bubble still looming in the background it is hard to tell where the bottom of the decline ‘should’ be. So if you are buying beware of overpaying. No one is quite sure where prices are based upon “normal” relationships like rent equivalency and wage to price ratios, or even whether such ratios have meaning at the moment. Clearly they didn’t during the run up in prices, and so the question is how long it takes for those relationships to re-assert themselves on the downside. I would expect some typical “overshoot”, meaning that prices drop more than “normal” ratios suggest they should because of adverse psychology and localized oddities like large unsold inventories. So the unwinding of the bubble continues apace, in fact it looks as if the downward pressure has been restored for a while longer. And if you are selling, be aware that any price you have in mind that includes gains since 2003 is a stretch.
As for the impact on the general economy: I agree home price declines might slow things down, but I doubt enough to offset buoyancy elsewhere. Most likely it adds a little drag and undoes a bit of the gain from the recent tax deal passed through Congress. I still think we will see GDP growth close to or a little beyond 3% next year. It’s 2012 we need to worry about.
