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By now there is probably no one left in America, possibly no one left on the planet, who doesn’t know that home prices are falling, and in some cases, falling very fast. While the headlines on the monthly release of the S&P/Case Shiller® Home Price Indices are widely reported, much less attention or analysis is given to some of the more interesting details. Digging into the data released at the end of April—covering prices through February—provides a clearer picture of what is happening to home prices across the country.
While this is not the first time home prices have declined, the movements seen since the start of the decade are not typical. First, the nationwide increase in home prices was far larger than anything seen recently. The old adage about real estate and location location location was largely true: Prices might soar or tumble in one region while doing the reverse or barely moving in a neighboring state.
This time the home price event is national in scope. Its breadth reflects that over the last 10 to 20 years the mortgage market has become a national market. Those who recall the reversals suffered in the early- to mid-1990s saw the first hint of a national mortgage market; by a few years ago, it had arrived. The Fed’s low interest rates, rising willingness both by lenders and borrowers to take on more risk and the attendant laxity in lending standards covered the nation. As a result, home prices across the country rose and then fell. For the last six months, all 20 of the cities covered by S&P/Case Shiller® have seen prices fall month to month; only one city, Charlotte, N.C., can claim that prices are up over the last 12 months.
National in scope does not mean prices move in lockstep. Among the 20 cities are Boston; where prices peaked in October 2005, and Charlotte, N.C., where they didn’t peak until September 2007, almost two years later. One reason why Charlotte still is up over the last year is that it hasn’t had enough time to fall that far—something that could change in one of the next reports. Not only do different cities experience their peak prices at different times, the gains and losses vary across the board. Figure 1 summarizes this data.
Using the beginning of 2000 as the base period—back when the boom was in dot-com stocks rather than homes—we see that the rate and level of appreciation varies across the cities. Miami takes the blue ribbon with prices up 181 percent by September 2007; with Los Angeles, up 174 percent; and Washington, D.C., up 151 percent, close behind. However, Los Angeles reached its peak three months earlier than Miami. At the other end of the scale is Detroit, where prices rose only 27 percent from January 2000 to January 2006, a compound rate of 4.1 percent; not that far ahead of inflation. Other than Washington, the big gains were in the Sun Belt states with Miami, Las Vegas, Phoenix, San Diego and Los Angeles leading the way. The industrial Midwest and the midsection of the country trailed with Detroit and Cleveland, plus Denver and Dallas, seeing only modest gains. The composite index covering all 20 cities saw prices rise 107 percent, peaking in August 2006.
There is definitely a pattern of “the bigger they are, the harder they fall.” Miami scored the largest gain and, with a 22 percent slide since it peaked, one of the larger declines. Moreover, Miami was a late bloomer and managed to see home values drop by more than a fifth in seven months, while Las Vegas home prices took a year longer to fall only two percentage points more. If one measures the bust by the speed of descent, Miami “wins.”
There is a second set of data that confirms the pattern of “the bigger they are, the harder they fall.” For 17 of the 20 cities, there are tiered price indices showing the price movements for low-, mid- and high-priced homes. The break points for the prices are set city by city and divide the market into thirds. Only 17 cities are covered because of data availability. City by city, the least expensive homes saw the largest increase and the largest decrease in prices. Figure 2 shows the pattern for San Francisco; it is similar for other cities. These were the homes where the speculation and aggressive lending and borrowing was concentrated. It strongly suggests that innovations in mortgages drove a large part of the shifts in the housing markets.
In some cases, the range between low- and high-priced homes was large—in San Francisco, low-priced home prices fell 32 percent from their peak, while high-priced homes slid only 6 percent; midpriced units were down 20 percent from May 2006, when prices in San Francisco peaked. However, low-priced homes continued to gain until August 2006, and since then, are down 35 percent. At that peak, low-priced homes were up 276 percent—worth almost three times their January 2000 price. By February of this year, the price was down to only 180 percent of the January 2000 level.
With prices still close to double their level eight years ago, after falling by more than a third, are we near a bottom? Despite careful searching through each month’s release for close to a year, there is no way to tell. There may be a few spots where prices appear to be pausing, but there are no clear signs of when things will turn around. One of the nice parts of maintaining and publishing these indices is that I am not allowed to forecast them—and so can’t get the forecast wrong. All these data, and more, are posted at www.homeprice.standardandpoors.com, so you are welcome to join the search for the turning point in homes.
(Written with data available as of April 29, 2008.)
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