The Decline Continues in Home Prices

The Decline Continues in Home Prices

Written by Polina Vlasenko

Recently released data for the S&P/Case-Shiller Home Price Indices show that the decline in house prices continued throughout 2008 and there are no indications of a turnaround. The chart shows the annual percentage change in the Case-Shiller U.S. National Home Price index, in a 10-city composite index, and in a 20-city composite index since their inception. The S&P/Case-Shiller indices track changes in the value of the residential real estate in 20 metropolitan areas. The U.S. National Home Price Index is a broader composite of single-family home prices. All are constructed from the sale prices of existing homes, taking into account possible quality changes. Because each is constructed from the actual sale prices, there is very little room for subjective judgment in the valuation. This makes these measures very accurate in reflecting the change in the market prices of existing homes. (The indices do not include initial sale prices for the newly built residences.) Over the past year, the National Home Price Index decreased 18.23 percent, the largest annual decline on record. The 10-city and 20-city composite indexes, which combine data from major metropolitan areas, decreased by 19.4 and 18.97 percent, respectively. According to all three of these indices, house prices have been continuously falling since January 2007. All three are now at the level they held around September-October 2003. Among the major metropolitan areas, the hardest hit are Phoenix, San Francisco, and Las Vegas, each of which experienced more than a 30 percent drop in house prices over the last year. Phoenix leads this unfortunate list with a 34.96 percent decline over the last year. The areas experiencing the largest drops in house prices are usually the same areas that saw dramatic increases, over 40 or even 50 percent a year, during the boom. At the opposite end of the spectrum, Denver, Boston, New York City, Cleveland, Dallas, and Charlotte, NC, experienced a drop in house prices of less than 10 percent. Dallas experienced the smallest decline in house prices last year, only 4.87 percent. None of these areas experienced an increase in house prices in excess of 20 percent per year since the inception of the Case-Shiller index in 1987. The data do not give any indication when a turnaround in house prices might occur, but it seems unlikely to be soon. An article in the most recent Research Reports explores the relationship between the house prices and rental prices. According to that analysis, a further decline in house prices is likely.