The Case-Shiller index of housing prices released yesterday showed further declines. Interesting to note is that all twenty of the major city markets tracked show month-over-month declines in the non-seasonally adjusted figures and all but two (Denver and Washington, DC) show month-over-month declines in the seasonally adjusted figures. Calculated Risk adds:
Prices in Las Vegas are off 57.8% from the peak, and prices in Dallas only off 8.6% from the peak.
Prices are now falling – and falling just about everywhere. As S&P noted “six markets â€“ Atlanta, Charlotte, Miami, Portland (OR), Seattle and Tampa â€“ hit their lowest levels since home prices started to fall in 2006 and 2007”. More cities will join them soon.
The decline in housing prices is now a national phenomenon but some regions are suffering significantly more seriously than other and the reasons for the declines differ among the most-affected regions. This is not a problem amenable to a one-size-fits-all solution.
Gary Shilling makes a compelling and chilling case that we should expect an additional 20% decline overall in housing prices. I expect that most of those will prove to be regional as well with those areas that enjoyed the largest gains during the housing bubble suffering the largest declines now. Felix Salmon remarks:
No one wants to buy a house if they donâ€™t feel secure in their job, and people donâ€™t feel secure in their jobs if unemployment is over 9%, where itâ€™s likely to stay for the foreseeable future. And these graphs just speak for themselves:
but points to demographic reasons to expect an eventual recovery in prices:
As for the reasons for future gains in house prices, thereâ€™s a bit of basic demographics, in that the number of households in the US is going to rise over time, and is going to outpace the amount of new homebuilding. Thatâ€™s reasonable.
I think he’s misreading the demographics a bit. As I have documented here today’s 20 to 35 year-olds have lower incomes, lower levels of educational attainment, and lower income prospects than 20 to 35 year-old did 30 years ago. It takes more than numbers of hypothetical buyers to make a market. There’s got to be willingness on the part of buyers to pay a price at which sellers are willing to sell and, as I have said before, I think that the great story in housing in coming years will be a reversion to prior trend. That’s essentially what Mr. Shilling is predicting. See, particularly, this chart.
What would the implications of further declines in housing prices be? Four come immediately to mind: further declines in employment in housing construction, further declines in retail sales, further declines in total wealth (at least among those in the bottom 99% of income earners), and a higher proportion ratio of taxes to wealth (at least among the same group).
Judging by this graph courtesy of the St. Louis Federal Reserve, construction employment has fallen by two million since its peak in 2006. According to Builder a million of those were in residential construction. Further, total construction employment has fallen by a million relative to its number in 2000. About 5 million people continue to be employed in construction. How many will be affected by a further 20% decline in home prices?
There’s an intimate relationship between housing and retail sales. Not only do people who buy new houses buy more furniture, appliances, carpets, and so on than those who don’t but over the last ten years housing equity has been a substantial source of money that people used to support their lifestyle. They borrowed not only against the equity they had in their homes but against the expected future value of their homes. Lower expected future value means less money available for consumer spending.
For most people much of their total wealth is in their homes. See here for an examination of how the recession has affected wealth. A further decline of 20% would aggravate an already serious problem.
Recently, I posted some statistics that illustrated real estate taxes have risen even as property values have declined. For a further examination of this see here. Obviously, if property taxes rise and values fall the proportion of the wealth of ordinary people that’s being sucked away will rise, too.
For me the bottom line on all of this is that I simply don’t see where economic growth will come from in the coming year and I further think that people’s grouchy moods are likely to persist. And will be understandable.