The headline looks pretty dire: “S&P: Home prices post 17 pct annual drop in August”. The text of the article isn’t a lot more encouraging:
NEW YORK – Home prices tumbled by the sharpest annual rate ever in August, with little indication of a turnaround in sight, a closely watched index showed Tuesday.
The Standard & Poor’s/Case-Shiller 20-city housing index dropped a record 16.6 percent from August last year, the largest drop since its inception in 2000. The 10-city index plunged 17.7 percent, its biggest decline in its 21-year history.
Both indices have recorded year-over-year declines for 20 consecutive months.
When you look at the actual numbers the article is based on you get a somewhat different picture. Here are the percentage month over month price changes for July to August 2008:
| City | Percent decrease |
|---|---|
| AZ-Phoenix | 2.86 |
| CA-Los Angeles | 1.75 |
| CA-San Diego | 2.31 |
| CA-San Francisco | 3.48 |
| CO-Denver | 0.02 |
| DC-Washington | 0.32 |
| FL-Miami | 1.80 |
| FL-Tampa | 0.44 |
| GA-Atlanta | 0.21 |
| IL-Chicago | 0.05 |
| MA-Boston | -0.10 |
| MI-Detroit | 0.83 |
| MN-Minneapolis | 1.01 |
| NC-Charlotte | 0.83 |
| NV-Las Vegas | 2.35 |
| NY-New York | 0.24 |
| OH-Cleveland | -1.07 |
| OR-Portland | 1.31 |
| TX-Dallas | 0.21 |
| WA-Seattle | 0.72 |
Negative percents represent price increases. I’ve taken the liberty of highlighting all of the cities for which month over month prices increased or decreased at greater than 1% and color-coded them by region (Pacific/Southwest-red, Central-green, Northeast-black, Southeast-blue).
As I hope this table makes clear, the problem that falling housing prices constitutes is highly regionalized even localized. Sharply dropping housing prices are nearly synonymous with the Pacific/Southwest region. I would speculate that they’re going down there because they went up so dramatically; if you liked the rise, you should at least tolerate the decline. Do we really think that housing prices are declining in Detroit and San Francisco for the same reason? Or that the same remedy will cure the problem?
Is there a problem in places like Chicago, Dallas, or Atlanta at all? To conclude that I think you’d have to say that any decrease in housing prices constitutes a problem. I’m not sure what remedy other than rampant inflation would correct that.
The problem I have with the news article is its alarmist tone. I don’t think you can conclude from the data that there’s a nationwide problem, other than as falling housing prices along the Pacific coast and in the Southwest affect interstate institutions.
I don’t know whether this is due to innumeracy on the part of the editors, the “if it bleeds, it leads” phenomenon, or whether the editors really want to make things look worse than they are. There’s a news story here but not the one they’re telling.
Your analysis even works within markets. In the Twin Cities for example, some counties have actually had price increases over the last year. Only in the particularly overbuilt areas has there been a marked decrease.
Evidently the same thing is even going on in California. By and large it is overbuilt inland communities that are bringing the overall rate down. Places nearer the ocean are holding their own or even increasing.
But, yes, “The Sky Is Falling” makes for better copy.
It is highly localized. For example, my wife and I own a house in Florida, the value of which has dropped about about 3% a month over the last year. We had the house on the market for about a year right when the housing bubble burst but couldn’t sell – we were perpetually on the backside of the falling pricing wave and there were few buyers.
So we rented for two years. We put the house back on the market this past summer for about $150k less than it was listed for two years ago. Price drops appear to have slowed somewhat and hopefully we are nearing the bottom. The house is getting a lot of activity and we may end up selling through a lease-purchase option. We were lucky that we maintained a high degree of equity in the property and did not borrow against the rise in value before the bubble burst. At its peak, our house was appraised at $450k – now we are listing for $235k and will probably sell for about $210k or so.
So our area was particularly bad with a huge bubble and a huge deflation on the backside. Prices have returned to about what they were in 1990-2000 in our area, so those who bought before then are fine (unless they tapped equity), those who bought afterward are hurting from the negative equity.
In addition to localized effects, there are huge differences within localities depending on the type of property – at least in our area of Florida. For example, waterfront properties had the biggest swing from high to low, while newer homes in planned “cookie cutter” communities have taken the smallest swing. There is so much variability depending on the particular market, neighborhood and property type that I’m not sure how valuable regional or national averages really are.