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Home Prices Back to Late 2000 Year Levels

Posted Wednesday, July 1, 2009

The April Case-Shiller 20-city index showed considerable slowing in the rate of house price decline. The index fell just 0.9 percent for the month. It had been falling at more than a 20 percent annual rate earlier this year, so the April data show a much slower pace of price decline. They also show much greater variation across markets, with four of the twenty cities actually reporting price increases for the month, while several cities continue to report house prices declining rapidly.

The four cities with price increases were Dallas and Denver (both 0.7 percent), Cleveland and Washington, D.C. (0.1 percent). San Francisco, which had been seeing sharp rates of price decline, had a 0.5 percent decline in house prices in April. The rate of price decline moderated in the other California markets as well, with prices in Los Angeles falling by 1.2 percent and prices in San Diego dropping by 0.8 percent. Over the last year, prices in these three cities are down by 28.0 percent, 21.2 percent, and 20.0 percent, respectively, so the April data indicate a substantial slowing in the rate of decline.

At the same time, several other former bubble markets continue to have rapidly falling prices. Prices fell 3.7 percent in April in Las Vegas, 2.8 percent in Phoenix, and 1.9 percent in Miami. Over the last three months, prices in these cities have fallen at annual rates of 35.3 percent, 36.2 percent, and 28.4 percent, respectively.

By price category, it appears that most of the moderation is coming at the middle and higher end of the market. In San Francisco, prices for homes in the bottom third of the market fell by 2.2 percent in April and have fallen at a 20.5 percent annual rate over the last quarter. In San Diego, prices for bottom-tier homes also fell 2.2 percent in April and have dropped at a 20.9 percent annual rate in the last three months. In Los Angeles, prices for bottom-tier homes fell by 2.9 percent in April and have fallen at a 27.4 percent annual rate over the last quarter. There is certainly no evidence of moderation in the rate of price decline for this segment of the California market.

Interestingly, there is a very different pattern in some of the other markets. Prices for homes in the bottom tier rose by 0.4 percent in Boston and 0.5 percent in Portland. They jumped 2.2 percent in Washington, D.C. and 2.7 percent in Denver. In the latter two cities, prices of homes in the bottom tier had been falling considerably more rapidly than more expensive homes, so this may just be a partial correction of the gap that had been created.

It is far too early to say that the house price plunge is slowing. The April data reflect the prices of homes sold from March through May, which would have contracted most in the months from February to April. This period includes the low-point for mortgage interest rates, which have now risen by more than a half percentage point from their lows in April. Unless the Fed is committed to substantially increasing its purchases of mortgage-backed securities, it is almost inconceivable that mortgage rates will return to their April level, and they may actually rise further from levels that are still extraordinarily low by historical standards. The economy is also continuing to shed jobs at a very rapid pace, which will further erode the number of potential homebuyers.

Real house prices are now back to their level in late 2000 by the Case-Shiller data. This suggests that they have another 10-15 percent to fall to return to their pre-bubble levels. However, there is a high risk of overshooting, which looks almost certain to happen in some of the former bubble markets. For example, real house prices in Phoenix and Las Vegas are already well below their mid-90s level and are still falling rapidly. If nationwide house prices overshoot on the down side, it will further depress consumption, delaying recovery, and wipe out much of the remaining home equity that retiring baby boomers have left.
By Dean Baker