PrintThe recent release of the Case-Shiller home price index for March was disappointing news for the housing markets. The Case-Shiller 20-city index fell 18.7 percent in March compared to a year earlier. All of the 20 cities reported annual rates of decline. It is clear that the pace of home value deterioration remains severe. Until home prices stabilize, it is difficult to imagine a housing sector in recovery.
Phoenix, Las Vegas and San Francisco experienced the largest price losses in March, registering a negative 36.0 percent, 31.2 percent and 30.1 percent, respectively. Conversely, Denver, Dallas and Boston posted the smallest price losses in March, registering a negative 5.5 percent, 5.6 percent and 8.0 percent, respectively. Even these small price losses reflect a housing market in retreat. Further, the year over year FHFA purchase-only home price index (released on Wednesday) declined 7.3 percent in March compared with year over year declines of 6.9 percent in both February and January. The index is getting worse not better. And the median price of existing homes (released on Wednesday) declined 15.4 percent in April from a year earlier, which was a larger drop than the 10.2 percent year over year decline in the median price of existing homes registered in March.
Falling home values are due to a number of factors worth mentioning. Weak demand for home buying is near the top of the list and is a direct result of today’s recession which is shedding jobs at an alarming pace. A loss in household wealth due to falling property and equity values is also keeping households from trading up to larger homes. In addition, because home prices continue to fall there are some households who are postponing home purchases in anticipation of prices falling further; a catch 22 of enormous proportions over the past several years. Further, housing demand is inhibited by today’s tighter credit requirements, keeping households who can not obtain mortgage credit from the purchase market. And of course, there continues to be an excess supply of homes available for sale in the marketplace which further depresses home values.
With all that said, the top factor contributing to falling home values are mounting foreclosure sales. A steady flow of foreclosed properties is keeping housing inventory high relative to sales. The National Association of Realtors reported that 45 percent of existing home sales reported for April were foreclosure transactions. The association also reported that the average price of foreclosure sales was at a 20 percent discount to the average price of non-foreclosure sales. It is evident that future foreclosure transactions will continue to exert downward pressure on home values.
On the other side of the housing coin, home sales continue to be weak even with a steady dose of foreclosure transactions. Existing home sales in April was only 4.68 million annualized units, close to its 3 month average of 4.65 million units, indicating that existing home sales are drifting slightly upward from its cyclical low of 4.49 million units pace set in January. Existing home sales seem to be going nowhere; hovering in the 4.5 to 4.9 million range.
Looking forward, existing home sales may turn for the worse as the government’s foreclosure mitigation programs (loan modifications and refinancings) are likely to reduce the number of properties that go into foreclosure in the near future. I expect about 1.9 million properties will enter foreclosure in 2009 compared with 1.7 million foreclosures in 2008. Ironically, weak home sales might be good news for the housing situation in that they reflect less foreclosure transactions which, in turn, ease downward pressure on home values.
On balance, the housing sector has more negatives working against recovery than positives for it. Home values are not yet showing signs of stabilizing and home inventories remain alarmingly high. The inventory of homes available for sale in April increased markedly to 3.97 million compared to 3.65 million in March. The increase was expected because we always expect a jump in inventory during the spring due to an increasing number of households with children putting their homes on the market. But the months’ supply also jumped to 10.2 which indicate an oversupply of homes given the current sales pace. Suffice it to say, we have a long way to go before we can claim that the nation’s housing sector is on the road to recovery.
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