Case-Shiller shows a further decline in prices

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If you thought house prices were about to show some price gains, think again.  The Case-Shiller Home Price Index for March 2009 was released this morning and it paints a fairly grim picture.  The Composite-10 index shows an18.6% decline in prices over the last year, while the Composite-20 registered a 18.7% drop in that time.  Both figures reflect numbers using the non seasonally-adjusted data series.  Two markets, Denver and Charlotte, saw price upticks from February to March. This is encouraging as no market in the Composite-20 has seen a price uptick in any month since Lehman went bust in late September.

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So what does this mean for the housing market going forward?  If you look at bubble cities like Phoenix, Miami, Las Vegas, and the whole of California, it means a huge loss in tax revenue.  It is no surprise that California is nearly bankrupt.  Given the outsized importance of Phoenix and Las Vegas in their states and the need to balance state budgets, you should expect some major cuts in services in both of those states as well.

But, the continued price decline will become important as the Spring and Summer selling season has begun.  Now is the time when most transactions occur. With prices still declining, those with unaffordable mortgages in negative equity will have to seek foreclosure as they often cannot sell and they will be unable to refinance.  This is increasingly going to be Option ARM type buyers in the prime mortgage class as subprime has already been decimated.

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As far as home builders are concerned, their is still too much inventory.  They are going to have to cut back building investment even more and this is going to be a drag on GDP in Q2 and Q3.  As the home selling season progresses, watch the unsold home inventory as a harbinger for price developments.  If inventories build in the prime selling season, we are going to see more price cuts come fall and that will increase market distress and reduce the tax base even more.  However, if inventories are worked off, we may see the pace of price declines slow.

At present, prices are of 33.1% from their high in the Composite –10 and 32.2% in the Composite-20.  A fifty percent peak-to-trough decline in house prices nationally is not out of the question.

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