‘At Least the Rate of Decline Has Slowed’ in U.S. Housing Prices

BY Paul Solman  May 29, 2012 at 2:24 PM EST

Chicago Homes Highrise condominiums line Chicago’s Lake Shore Drive. Chicago, along with Atlanta, Las Vegas, New York and Portland, saw average home prices hit new lows according to the May S&P/Case-Shiller Home Price Indices report. Photo by George Rose/Getty Images.

The Case-Shiller Home Price Index is out Tuesday and the headline numbers were greeted with headlines like “Housing Double-Dip Worsens as Prices Fall to New Lows.”

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The headlines from S&P/Case-Shiller themselves:

• All three headline composites (20- and 10-City Composites, National Composite) ended the first quarter of 2012 at new post-crisis lows;

• Five cities – Atlanta, Chicago, Las Vegas, New York and Portland – saw average home prices hit new lows;

• The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, posted a 1.9 percent decline in the first quarter of 2012 over the first quarter of 2011;

• National Composite fell by 2.0 percent in the first quarter alone and is down 35.1 percent from its second quarter 2006 peak;

• The 10- and 20-City Composites recorded annual rates of decline in March of 2.8 percent and 2.6 percent, respectively;

• In March 2012, 12 MSAs posted monthly gains, seven declined and one remained unchanged;

• Phoenix posted the largest annual rate of change (+6.1 percent) while home prices in Atlanta fell the most over the year, down 17.7 percent.

Moreover — and this is something most people don’t focus on — the Case/Shiller prices are in nominal, not “real,” dollars. That is, they’re not adjusted for inflation. Thus, when the Index reports that prices are down 2.6 percent from last year in nominal dollars, when you add in the 2.6 percent inflation we’ve experienced, they’re really down 5.2 percent.

Making Sense

What to make of prices long-term? As Bob Shiller put it in a morning press conference call, after soaring from 2000 to 2005 and crashing through 2007, housing prices are back in line with their 100-year trend. So are expectations of future price appreciation, it seems.

So does that suggest a rebound? “Some stability,” said David Guarina of S&P, in an otherwise “disappointing report.”

Prices not adjusted for inflation.

On the bright side, at least the rate of price decline has slowed. And Bob Shiller noted that one indicator of future growth is positive: housing permits are up, after being in “a holding pattern” for years.

Chip Case added that housing starts are up even more, but reminded listeners that they’re up from the lowest level ever recorded and still near their 60-year low.

New insights, for me, concerned household formation, the “bifurcated” housing market, and the prospect for higher mortgage rates.

Household formation, said Shiller, tracks prices: In other words, the more households created, the higher overall prices are, presumably because of increased demand. But household formation has not been keeping pace, due to more pooled living arrangements. And new households are mainly renting, not buying. In fact, net home ownership is down in the past year, if I understood Chip Case correctly.

As to bifurcation, Case pointed out that there are really two housing markets these days: zip codes with people who have financial “flexibility” and places were most sales are “distressed” — “two markets existing side-by-side,” as Chip put it, but with completely different buyers and sellers.

On the subject of interest rates, Case pointed out that the federal government now holds or guarantees $4-5 trillion worth of mortgages. As they get taken over by the private market, a new interest rate will reflect the actual risk of default, in which case “interest rates would rise by 300 basis points,” said Case: a full 3 percent. And just imagine, added Bob Shiller, how that figures to discourage would-be home buyers who no longer expect prices to rise.

Thus Shiller’s final words, in response to the inevitable question about the future: “There’s a good chance we’ll continue down for years.”

But remember, this is the famously anxious Bob Shiller, whose possibly congenital caution we captured on the Go-Kart track (among other venues) a decade ago.

Chip Case was less pessimistic although he acknowledged, “If the European banking system goes, there’s a recession or a war, then all bets are off.”

But even Shiller reminded us (and perhaps himself) that “prices are the last thing to turn around.”

Given more home starts and home permits, then, David Guarina, who chaired the press conference, ended it with his forecast: “Stability and possible recovery.”

Interactives by Justin Myers.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions