Housing Prices Keep Declining

Price Declines Accelerate in September Data

by Dean Baker (CEPR)

Policy makers somehow still can't understand that the economy has a housing bubble.

The Case-Shiller 20-city house price index showed an accelerated rate of price decline in September. The index fell by 1.9 percent for the month. It has fallen at a 14.9 percent annual rate over the last quarter. The index has dropped 17.4 percent over the last year and is now down 22.1 percent from its peak in May of 2006, a fall of almost 30 percent after adjusting for inflation. This would imply a loss in housing wealth of almost $6 trillion.

It is important to realize the extent to which these data lag the current situation. The September data are an average of the contracted prices for houses sold in August, September, and October. Since there is typically a six to eight week period between when a contract is signed and when it is sold, the data in the Case-Shiller index are based on contracts that were signed primarily in the months of June, July, and August.

The sharp falloff in the economy that began in September and October would not be reflected yet in these data. If house prices continued to fall at the 1.9 percent monthly rate reported for September, then the price of houses contracted today would already be 7.5 percent lower than the numbers the index shows for September. Of course, if the September-October plunge affected house prices, then the decline over this period would be even larger.

The price declines were broadly based in September, with not a single city reporting a price rise. The sharpest declines were again in deflating bubble markets. Prices in San Francisco fell 3.7 percent in September and have fallen at a 31.0 percent annual rate over the last quarter. Phoenix had the second sharpest price decline, with 3.2 percent drop in the month. House prices in Phoenix have fallen at a 32.8 annual rate over the quarter.

Prices in San Diego fell 2.5 percent in September and have dropped at a 24.6 percent rate over the quarter. Prices in Washington, D.C., fell 2.0 percent and have fallen at a 15.4 percent rate over the quarter. New York prices have yet to feel the full impact of layoffs in the financial sector, but they still dropped 1.1 percent in September and have dropped at a 6.6 percent annual rate over the quarter.

Perhaps the most disturbing item in the new data was the continued price decline in cities without bubbles. In Atlanta, where real house prices are almost back to their mid-90s levels, house prices fell by 0.9 percent in September and have fallen at a 6.2 percent rate over the last quarter. In Detroit, where real house prices are almost 15 percent below their mid-90s level, house prices fell 2.4 in September and have fallen at a 14.3 percent rate over the quarter.

In these markets, there is a real risk of a downward spiral that will go far beyond a simple correction from bubble-inflated prices. As prices continue to fall, foreclosure and abandonment rates will increase, putting further downward pressure on prices. In addition, very few people in the area will have any substantial amount of equity in their current homes to use for a down payment on the purchase of a new home. And of course, banks will be reluctant to lend in markets where prices are falling rapidly.

It would be useful for the federal government to seek to stabilize house prices in such markets. Unfortunately, there has been no public discussion in Washington policy circles about a housing policy that distinguishes between deflating bubble markets and markets where there is no bubble or the bubble has already deflated. It would be a pointless waste of taxpayer dollars to try to stabilize prices in the former markets, while stabilizing house prices in the latter markets will be essential to the economic stability of these areas.

Policymakers in Washington managed to completely miss the bubble as it grew to enormous levels. Remarkably, even as the bubble's collapse is throwing the economy into the worst recession in 70 years, they somehow still can't see the bubble.

-- November 26, 2008