Housing Prices Still Falling (Zacks.com)
Tue, 26 May 2009 18:29:10 Etc/GM
The best measure of housing prices -- the Case Schiller index -- was released today, and it shows no let up in the pace of housing depreciation. The ten-city composite (C-10), which dates back to the start of 1987, peaked out in April of 2006 on a seasonally adjusted basis at 226.14, and is now down to 152.81. The 20-city composite (C-20) which only goes back to January 2000, peaked in May 2006 at 206.13 and is now down to 141.35. Thus, the C-10 index is 32.4% off its peak while the C-20 is down 31.4%, not a big difference.
One reason that the Case Schiller index is of interest is that it is one of the key factors in the bank stress tests (although on the not-seasonally-adjusted basis). Home prices are continuing to track much closer to the 'more adverse' scenario than the baseline scenario (unadjusted actual of 151.41 vs. baseline of 154.42 and 'adverse' of 149.96).
The good news is that it is not tracking below the more adverse, so if the banks can raise enough capital to handle the more adverse scenario (and so far they have made significant progress in doing so, even though it will result in very significant dilution to the initial shareholders) they should be able to make it through this downturn -- although not with a lot of room to spare.
The other two key factors in the stress tests were GDP growth and Unemployment. First quarter GDP was in line with the more adverse scenario, and unemployment appears to be tracking below the more adverse scenario.
Relative to a year ago, the C-10 index is off 18.6% while the C-20 is off 18.7%. For the month, prices were down 2.0% and 2.2%, respectively. Prices fell in all 20 cities in March, although the declines were very small (less than 0.3%) in Dallas, Charlotte and Denver. Interestingly, those are the cities that have declined the least since the peak, as shown in the first graph below (from http://www.calculatedriskblog.com/). Note that the graph shows the declines since the C-10 peaked out -- the numbers that follow are based on the individual city peaks, seasonally adjusted. The housing markets that have already been battered took it on the chin again in March.
Six cities saw prices decline by more than 3.0% in March alone. Phoenix was down 4.4% on the month to bring its total decline from its peak to 52.4%. It certainly has ashes to rise from. Las Vegas crapped out again, falling 3.7% on the month to bring its cumulative total decline to 49.9%. Miami was off 3.2% for the month bringing its cumulative decline to 46.9%. Thus the three cities that have fallen the most from their peaks are still getting hit hard, while those that have been relatively unscathed so far continue to avoid the brunt of the declines. The three other cities that fell the most in March were Minneapolis (-5.4%), Detroit (-4.6%) and Chicago (-3.0).
The massive declines we have seen nationwide raise the question of how much further we have to go. The declines in even the strongest cities are comparable in scope to what generally has happened historically in sharp regional declines -- for example the peak-to-trough decline in San Diego in the early 1990's was 16.7%. The declines in the weaker cities are probably comparable to the worst seen in the Great Depression.
The two best metrics for judging if houses are cheap or expensive are the ratios of price to income and price to rent. Anyone who claimed that they could not see a bubble forming in housing (I'm looking at you, Mr. Greenspan) was clearly not paying attention to these metrics.
The first graph below (both are from http://www.calculatedriskblog.com/) is set so that the level in the first quarter of 1987 is equal to 1.0, not the actual ratios, but they trace the movement of the ratios. They are based on the national numbers, but to be really relevant for someone looking to buy a home, numbers based on the local area would be much more relevant.
On a housing-price-to-median-income basis, we are almost back to the 1.0 level of early 1987, and within the 0.92 to 1.08 range that prevailed from then until 2001. This is very much a hopeful sign that the decline could soon come to an end, or at least that over the long term, a buyer could feel fairly confident that he was getting a decent price. On the other hand, we still have lots of excess inventory, most of which is distressed. This means it is likely that housing prices will undershoot what will prove to be the long-term equilibrium.
The price-to-rent history tells much the same story as the price to income graph. Note that the 1.0 level in this graph is set at 1997, not 1987. The pattern though is almost identical, ranging between 1.0 and 1.2 until 2001 and then soaring to absurd heights only to come crashing back.
We are right in the middle of that 'fair value' range at 1.1. However, rents have started to fall at the major Apartment REITS such as Equity Residential (NYSE: EQR - News), Mid-America Apartments (NYSE: MAA - News) and Apartment Investors (NYSE: AIV - News) and that usually presages declines in the rent component of the Consumer Price index (one more reason to be more worried right now about deflation than inflation, but longer-term inflation will be the bigger threat).
This also suggests that there are still more price declines to come, but that the worst of it is now behind us. While much depends on what city you are in, housing prices are now reasonable, but not exactly cheap. We will probably undershoot 'fair value,' so if you can hold off buying a new house for a few more months, your patience is likely to be rewarded. On the other hand, if you are planning on staying in the house for the next 20 years, it will not make that much difference at this point (unlike the past few years).
Read the full analyst report on EQR
Read the full analyst report on MAA
Read the full analyst report on AIV
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