The Case Schiller indexes showed that housing prices were mixed in March on a seasonally adjusted basis. Since there is a distinct seasonality to housing prices (they tend to go up in the spring and down in the winter), those are the numbers that should be focused on. Many of the press reports you will see will be based on the non-seasonally adjusted numbers.
In March, the Composite 20 (C-20) index was down 0.05% from February, while a subset with a longer history, the Composite 10 (C-10) index posted a gain of 0.16%. Nine cities posted month-to-month gains while 11 saw declines on the month.
Biggest Gainers
Some of the biggest month-to-month gains were from California, where San Francisco led the pack with a gain of 1.49%, and San Diego was up 0.94%. They say that California leads the nation — those cities were some of the early poster children for the bursting of the housing bubble and now seem to be leading the comeback.
Sandwiched in between San Francisco and San Diego was Cleveland, with a gain of 0.98%. The dynamics in Cleveland were very different from those of California. It never had a housing bubble, but saw prices decline due to a weak economy, high unemployment and a loss of population. The other cities filling out the top-5 winners for the month were Denver (up 0.50%) and Boston (up 0.33%).
Biggest Losers
The list of the biggest losers on the month was eclectic. The nascent rebound in the Auto industry does not seem to have translated into higher housing prices in Detroit yet. It suffered the biggest month-to-month decline, falling 3.66%.
Chicago followed with a 2.03% decline, and Minneapolis was down 1.45%. So in that respect, it looks like a tough month for the Northern Midwest, though they were joined by Charlotte, down 1.45%, and Atlanta, which saw a 1.28% decline.
The graph below (from www.calculatedriskblog.com) shows the housing bust by cumulative periods, with the first (dark blue) bar showing how far prices had fallen by the end of 2007, the light blue bar showing the decline through the end of 2008, and so on. Thus if a red bar is shorter than the yellow bar it indicates that prices are up so far this year.
Note that among the biggest losers this month was one city that was affected very early on in the housing crisis and continues to struggle, Detroit. It also has one city that seemed immune to the nationwide collapse in housing prices early on, but is now falling more than the rest of the country, although still the decline from the peak is rather modest.
Pulling back to look at the year-over-year changes, the picture is generally somewhat brighter than the month-to-month change. The C-20 index is up 2.43% while the C-10 index has done even better with a 3.24% increase.
The cities leading on a year-over-year basis are pretty much the same as the ones doing well for the month. The biggest winner by far is San Francisco, with a 16.26% year-over-year gain, followed by San Diego, with a 10.82% increase. Minneapolis is the big exception, since it was down for the month but is up 6.62% year over year. Cleveland’s comeback is more than just a one-month thing, as it is up 6.73%. Los Angeles fills out the list of year-over-year gainers with a 6.09% increase.
The biggest year-over-year losers, though, are some of the cities that had already suffered the most by a year ago. Las Vegas has continued to be a losing bet for housing investors, falling 11.96% from a year ago. Detroit follows with a 4.49% decline. Tampa is down 3.50% year over year.
Remember that this is data from March, before the Deepwater Horizon sank. If oil starts washing up on the beaches of Tampa, it is not going to do good things for the value of the waterfront property there. Charlotte is down 3.89% over the last year and Seattle (another city that early on seemed relatively immune from the bursting of the bubble) is down 3.15%.
Relative to Peak Numbers
From the national peak in May 2006, the C-20 is down 29.32% while the C-10 is off 29.82%. All three of the California cities tracked have now moved out of the top five declining areas (they hold spots six through eight). However, two of the original poster children of the bust still remain as the worst hit:
Housing prices in Las Vegas are now 55.94% below peak levels. Phoenix is the only other city where prices have been cut in half or more, with a 50.99% decline. The two Florida cities tracked have the third and fifth biggest declines from the peak, with Miami down 47.38% and Tampa down 43.36%. In between is Detroit with a 45.01% decline.
There are no cities where the prices today are higher than in May of 2006, but there are three where the declines have so far stayed in the single digits. Dallas has held up the best, with prices down just 3.85% from the peak, followed by Charlotte, off 6.55% and Denver, down 7.57%. Boston (down 13.08%) and Cleveland (down 13.18%) have also held up relatively well.
Propped by Government Support
While this is a mixed report, keep in mind that it is coming in the context of massive government support for the housing market. Economic theory tells us that when a transaction is subsidized, both the buyer and seller will share in the subsidy. The seller’s share of the subsidy shows up in higher prices.
Clearly, the home buying tax credit is a subsidy to the transaction. A more indirect subsidy is the Fed’s now-completed purchase of $1.25 Trillion in mortgage paper, mostly backed by Fannie Mae (FNM) and Freddie Mac (FRE). That held mortgage rates below where they otherwise would have been, and also helped to support housing prices.
While that program has now expired, the crisis in Europe has caused the yields on T-notes to plunge, and mortgage rates have followed suit. The tax credit support is in the process of coming off. In the Case Schiller data we should see its effect for one more month, as house have to be under contract by the end of April to qualify.
It seems likely that when the government crutches come off that house prices could start to fall again. However, with prices already down by close to 30% from the peak, prices are not nearly as out of line with incomes and rents as they were a few years ago. Thus, any future declines are likely to be moderate, at least relative to what we have seen already.
Homeowners Equity to Take Another Hit?
Given the leveraged nature of the housing market, even small declines in the price of a house can have an outsized impact on homeowners equity. Homeowners equity is, or at least was, the principal store of wealth for the vast majority of Americans.
Each decline in home prices pushes more homeowners underwater. The further underwater people become, the more likely they are to simply walk away from their house. Sometimes they will arrange what is known as a short sale, where the house is sold for less than the value of the mortgage. If there is a second mortgage (and homeowners lines of credit of HELOC’s are generally second mortgages) on the property, it is usually wiped out.
Others will simply stop paying their mortgage and live rent- and mortgage-free until the sheriff eventually shows up to throw them out of the house. Neither course of action is good news for the big banks that have large exposures to the residential mortgage market, like Bank of America (BAC) or JPMorgan Chase (JPM).
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