US Home prices down 16% over last year

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The headlines about home prices are pretty dire, showing a record plunge in home prices of 16.3% over last year. In reality, it’s not all doom and gloom. So, let’s dig behind the headlines about the S&P/Case-Shiller Index released today to get a sense of what is really happening with U.S. home prices.

First, one must note the S&P/Case-Shiller index is for July 2008 prices and things have changed in the two months since.

Second, while the plunge is a record, the pace of decline is decelerating. This means that we are not going further down as quickly anymore. To me, this signals that most of the price declines are probably behind us. To be sure, we should see a 30-35% drop in home prices nationally from peak to trough at a minimum. But, as we have already seen 20% losses, that means prices could conceivably go down another 10-15% and bottom out there.

Third, some areas are actually stabilizing or rising again. These areas include Denver, Atlanta, Tampa, Chicago, Boston, Detroit, Minneapolis, Charlotte, Cleveland, and Dallas. This does not mean that declines are over, but, on the whole, that’s very good news for those markets.

Fourth, Case-Shiller divides the market into three tiers, the low, middle and high home price tiers. Not all tiers of the market are performing equally well. For example, in my home market of Washington, D.C. the low tier is getting absolutely crushed, while the middle and high tiers are falling less rapidly. The low tier had also risen more precipitously during the bubble as well.

Fifth, Case-Shiller looks at a number of different metro areas. It has a 10-City composite and a 20-City composite index. The 10-City Index peaked in June 2006 with the 20-City index peaking one month later. The peak to trough declines in house prices are 21.1% for the 10-City index and 19.5% for the 10-City index. Note: I have adjusted this price declines for inflation and find the 10-City composite to have fallen 27.3% in inflation adjusted terms and the 20-City index to have fallen 25.5%. I foresee a 50% peak-to-trough inflation adjusted fall as highly likely.

And finally, as I do every month, I get us into our Case-Shiller time machine to go back to the time when we last saw house prices this low in each of the twenty markets. The answer is in the chart below.


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