Recent data on single family home selling prices for the 20 largest metropolitan areas in the U.S. indicate that prices in most markets continue to decline. The monthly decline for the Standard & Poor’s/Case-Shiller Composite 20 Home Price Index (for the 20 largest metro areas) was -0.5% in November, which marks the fifth consecutive monthly decline for the index. So while other measures of our economy such as gross domestic product (GDP) growth (3.2% annualized increase for the fourth quarter of last year) or corporate profit growth continue to show solid progress, home prices—which are important in affecting consumer confidence and spending—continue to exhibit vestiges of deflation.

 

The Housing Bubble and Its Aftermath

The housing market went up, the housing market went down. And when it came down, it affected the global economy. In hindsight, the last decade saw the growth and bursting of a U.S. housing price bubble of historic proportions. One test economists use to assess whether a bubble did occur (unfortunately, only after the fact) is to examine the relationship between related prices in a market for how much they rose and then fell. If the prices that went up highest were also the ones that came down most (and vice versa), then it was likely an asset bubble that grew and burst.

 

In the scatter chart below, we plot the average home price changes for each of the 20 largest metro areas in the U.S. using S&P/Case-Shiller data. On the horizontal axis, we show the average percentage increase in home prices for each market between January 2000 and May 2006—a date that coincides with peak prices for nearly all these markets. On the vertical axis (extending downward to illustrate declines), we plot the subsequent percentage decline in home prices for these same 20 markets between May 2006 and May 2009. (This latter date was chosen because it coincides with the last official month of the Great Recession.)

 

 

As the chart title indicates, generally those metro areas with the largest (or smallest) price increases between 2000 and 2006 also saw the largest (or smallest) price declines between May 2006 and May 2009 as the diagonal line (showing the “best fit” of the data points) indicates. The chart also shows (simply by the amount of scatter between the points) that the experience of housing price run-ups and declines varied considerably by city. At one extreme were the “sun and sand” cities of Miami, Phoenix, Las Vegas, San Diego, Tampa/St. Petersburg, Los Angeles and San Francisco, where price increases averaged 160% and subsequent declines averaged -45%—or nearly half of the appreciated values that were realized by the peak of the bubble. At the other extreme were metro markets that hardly seemed at all affected by the housing bubble, like Charlotte, Dallas/Fort Worth and Cleveland where increases from January 2000 and May 2006 averaged only 25% and subsequent declines from May 2006 to May 2009 averaged slightly under -10%. And due to numerous factors, not the least of which was the collapse of the U.S. auto industry, the Detroit metro area is an outlier (a price increase during the bubble of only 22% but a subsequent decline of -43%) where average home prices today are less than they were ten years ago.

 

Continued Price Declines in Some Markets

The current concern is what has happened with housing prices since May 2009 (which many experts associated with the nadir of the price slump after the housing bubble burst). The chart below illustrates the percentage change in house prices for the largest 20 metropolitan areas between May 2009 and November 2010—the most recent month for which we have S&P/Case-Shiller metro housing price index data. The cities are arranged from those with the largest percentage price increases over this 18-month period to those with the largest declines.

 

The good news is that several cities that experienced the worst percentage price declines after the housing bubble burst (notably the three largest California cities of San Francisco, San Diego and Los Angeles) have now experienced average net price increases in the range of 7 to 11%. The Washington D.C. metro area (including Arlington and Alexandria), which experienced a relatively modest average price decline of -30% between 2006 and 2009 after a large price run-up of 150% from 2000 to 2006, has also seen average prices increase by 7.6%. And Minneapolis/St. Paul and Boston have also experienced modest average price gains.

 

 

However, 13 of the remaining metropolitan areas (excluding Denver where prices have been flat since May 2009) have seen continued price declines. Las Vegas, probably the most troubled housing market in the U.S. today, not only experienced a -53.1% decline between May 2006 and May 2009 but has also seen average prices decline an additional -11% in the following 18 months. More troubling to some real estate experts is that a number of markets that hardly participated in the pricing run-up associated with the bubble are exhibiting a slow but persistent continued slide in prices today. For example, the Charlotte metro area has seen average prices decline -5% over the past 18 months in contrast to a decline of -4.1% over the previous three-year period as the housing bubble burst.

 

Foreclosures and Unemployment as New Driving Forces

Two forces are believed to be behind the continued (albeit slow) decline in residential real estate prices for most U.S. metropolitan markets. One is the growing number of homes in the foreclosure process and the second is the persistently high rate of unemployment—which, like housing price changes, varies widely by city. The table below summarizes data from RealtyTrac on the number of residential properties with foreclosure filings in the 20 largest metropolitan areas. It is interesting to note that the direction of recent average price changes since May 2009 (summarized in the chart above) correlates roughly with the percentage change in foreclosure filings since 2009 in the table below. Many of the cities that have experienced declines in foreclosure filings, such as Los Angles, San Francisco, San Diego, Washington D.C., Minneapolis/St. Paul and Boston, are also cities that have experienced average price increases since May 2009. Likewise, those cities with the largest increases in foreclosure filings since 2009 have also been the ones with the largest average price decreases since May 2009, such as Charlotte, Atlanta and Chicago. High unemployment rates (a key contributing factor to rising foreclosures) is also a factor in several metro areas with declining home prices, such as Tampa/St. Petersburg (12.6% unemployment in December), Detroit (12.0%) and Portland (10.1%). The national average rate of unemployment in December was 9.4%.

 

2010 Residential Real Estate Foreclosures
Metropolitan Statistical Area (MSA)	Properties with Filings	Percent of Total Housing Units	Percent Change from 2009	Dec. 2010 Unemploy. Rate
U.S.	2,871,891	2.2%	1.7%	9.4%
Las Vegas-Paradise, NV	88,198	10.9%	-7.0%	14.3%
Phoenix-Mesa-Scottsdale, AZ	124,720	7.3%	-6.8%	8.5%
Miami-Fort Lauderdale-Pompano Beach, FL	171,704	7.1%	-0.7%	12.1%
Tampa-St. Petersburg-Clearwater, FL	64,963	4.9%	3.6%	12.6%
Atlanta-Sandy Springs-Marietta, GA	95,145	4.4%	20.7%	10.3%
Detroit-Warren-Livonia, MI	79,623	4.2%	15.1%	12.0%
Chicago-Naperville-Joliet, IL-IN-WI	138,913	3.7%	16.1%	9.0%
San Diego-Carlsbad-San Marcos, CA	40,983	3.6%	-16.6%	10.4%
Los Angeles-Long Beach-Santa Ana, CA	147,715	3.3%	-16.0%	12.1%
San Francisco-Oakland-Fremont, CA	51,525	3.0%	-4.7%	10.3%
Denver-Aurora, CO	29,870	2.8%	3.1%	8.7%
Cleveland-Elyria-Mentor, OH	23,531	2.5%	4.9%	8.5%
Portland-Vancouver-Beaverton, OR-WA	20,588	2.3%	2.9%	10.1%
Minneapolis-St. Paul-Bloomington, MN-WI	27,994	2.1%	-3.9%	6.5%
Washington-Arlington-Alexandria, DC-VA-MD-WV	43,962	2.0%	-22.0%	6.0%
Charlotte-Gastonia-Concord, NC-SC	14,732	2.0%	37.3%	10.8%
Seattle-Tacoma-Bellevue, WA	27,926	2.0%	22.6%	9.1%
Dallas-Fort Worth-Arlington,TX	41,325	1.7%	16.3%	8.2%
Boston-Cambridge-Quincy, MA-NH	22,767	1.2%	-4.5%	7.4%
New York-Northern New Jersey-Long Island, NY-NJ-PA	79,849	1.1%	-5.0%	8.5%

Source: RealtyTrac.com 2010 Foreclosure Report and U.S. Bureau of Labor Statistics (unemployment data)

 

 

A Different Kind of Housing Deflation

As noted earlier, there is a rough correlation between how high residential real estate prices went in the housing bubble between 2000 and mid-2006, and the how far prices fell in the subsequent bursting of that bubble from 2006 to mid-2009. And this type of price adjustment was the necessary correction for speculative excesses that had driven prices so high to begin with. In some markets, housing speculators owned multiple homes, using price increases to leverage up their investments in order to obtain cash for more purchases before “flipping” (i.e., quickly selling) homes as investments to cash out and reinvest in even more home price speculation. With price corrections of -50% or more in markets where this kind of speculation thrived, like Miami, Phoenix and Las Vegas, that correction has largely taken place (although the 14.3% unemployment rate in the Las Vegas area continues to bedevil prices in that housing market despite the decline in foreclosure filings since 2009).

 

Today, home price declines are being driven more by stubbornly high unemployment rates (which are adding to the number of foreclosure filings) along with much more aggressive actions by banks to resolve chronically delinquent home mortgages and rising foreclosures through bank repossessions and quick sales. Ironically, this is occurring primarily in markets where the housing bubble of the last decade was least prominent. Inventory levels are rising in many of these markets as the numbers of unsold homes pile up. And there are not a lot of renters with the job security, a 10% down payment, good credit and low levels of other kinds of consumer debt (i.e., credit cards) to step into the market.

 

In the near term (over this year), the situation is likely to get worse as several million homeowners are in some phase of foreclosure or seriously delinquent on loan payments. And millions more owe more on their mortgages than what their home is currently worth. Sales of foreclosed homes are part of the reason real estate prices continue to decline. Banks tend to reduce prices to quickly move properties. Knowledge of this and a coming wave in foreclosure sales has kept some potential buyers on the sidelines for now. And other potential buyers are concerned that as long as prices continue to decline, they too could end up with a new home and a mortgage that is underwater. For all these reasons—and the expectation that unemployment rates will remain high for much of this year—a large part of the U.S. housing market is likely to experience another year of weak demand and soft/declining prices.

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The S&P/Case-Shiller Home Price 20 Index tracks monthly changes in the value of single family home residential real estate in 20 major metropolitan regions. The methodology is based on the “repeat sales method” of index calculation which uses data on properties that have sold at least twice, in order to capture the true appreciated value of each specific sales unit. The index measures changes in housing market prices given a constant level of quality. Changes in the types and sizes of houses or changes in the physical characteristics of houses are specifically excluded from the calculations to avoid incorrectly affecting the index value.

 

Gross domestic product (GDP) is the total monetary value of all goods and services produced domestically by a country.

 

Since most of the data used in this Weekly Market Update—especially the scatter plot of home price changes by metro area—are  expressed as percentage changes, it’s worth noting some basic arithmetic regarding these kinds of data. For example, if a price index falls -50%, it will require a 100% subsequent increase to erase the -50% decline and bring the price index back to its original value.

 

 

 

 

 

 

 

 

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