I read a few articles the other day (here and here) talking about the state of housing in our country. Home prices fell 19.1% in the first quarter compared to the previous year, the largest decline in the 21-year history of Standard & Poor’s Case-Shiller Home Price Index series. The national index covers almost all homes sold throughout the United States and is reported quarterly, while the 20-city index reports sales in 20 major metro areas and represents a cross section of the national market. The 20-city index comes out every month.
Paul Dales, U.S. economist for Capital Economics in Toronto, pointed out the massive home price gains from 2000 to 2006 have now vanished. Home prices have fallen back to 2002 levels in nominal terms, according to Case Shiller. But they’ve returned to 2000 levels when inflation is accounted for.
“We’ve had 6 years of massive appreciation wiped out in 3 years of sharp declines,” Dales said.
Home sales are improving, a sign that a bottom could be near. But home prices are likely to continue to fall for some time. Some cities have already overshot pre-boom price levels. Detroit, for example, is already at 1995 levels, even before inflation is accounted for.
"All 20 metro areas are still showing negative annual rates of change in average home prices with nine of the metro areas having record annual declines."
What does this mean for you? It depends. For those who are looking to purchase a home this could be a very good thing. A necessary correction of sorts that will allow you purchase a home that does not make up an unreasonable amount of your overall spending. For those who are already homeowners it probably hurts a little bit more. But as I have said in previous BadskiBlog posts, losses and gains are only realized when you sell. As long as you can continue to pay your mortgage or have enough of an emergency fund built up in case you suffer the misfortune of a layoff you should be ok. The sky is not falling. The markets will correct themselves even if it is long, drawn out, and painful. I am learning first hand the difficulties associated with a market decline. Couple in a forced move in the military and I am getting a crash course in becoming a landlord. As an optimist, I am putting my head down and learning all I can as I work through this market. Who knows it may be the best thing to happen to me?
S&P/Case-Shiller 20-city home price index
Metro area 1-year change (%)
Las Vegas -31.2%
San Francisco -30.1%
Los Angeles -22.3%
San Diego -22.0%
New York -11.8%