House Prices Enter Free Fall

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January 28, 2009 (Housing Market Monitor)

House Prices Enter Free Fall

By Dean Baker

January 28, 2009

Prices may be 6 to 10 percent lower today than indicated by the November data.

The Case-Shiller 20-City index showed house prices falling by 2.2 percent in November, bringing their annual rate of price decline to 22.3 percent over the last quarter. Nominal prices in this index have now fallen by 25.1 percent from their peak in June of 2006.

Perhaps even more striking than the rate of price decline is the fact that prices are now dropping rapidly everywhere, including the markets that had been relatively strong. For example, in Charlotte, where prices are down by just 0.7 percent from the June 2006 level, prices fell by 1.9 percent in November and have fallen at an 18.3 percent annual rate over the last three months. In Dallas, where the economy had been strong because of its energy sector, prices also fell by 1.9 percent in November and have fallen at a 14.1 percent annual rate over the last three months.

Houses prices in New York and Boston had been holding up reasonably well in spite of the sizable bubbles in both markets. In November prices in these markets fell by 1.6 percent and 2.6 percent, respectively. The annual rates of price decline over the last three months in the two markets were 13.1 percent and 17.7 percent.

Prices in the other bubble markets continued their extraordinary rate of price decline. Prices in Los Angeles, San Diego, and Washington, D.C. fell by 2.2 percent, 2.3 percent, and 2.4 percent, respectively. The biggest drops in November were in Phoenix and Las Vegas, 3.4 percent and 3.3 percent, respectively. Over the last three months, price have fallen at annual rates of 25.3 percent in Los Angeles, 27.1 percent in San Diego, and 25.3 percent in Washington. In Phoenix prices declined at a 34.0 percent annual rate and at a 30.0 percent annual rate in Las Vegas.

Even Seattle and Portland are now seeing rapid price declines, with prices in November falling by 2.5 percent and 2.3 percent, respectively. Prices in Seattle have fallen at a 19.0 percent annual rate over the last quarter, while in Portland they have fallen at a 20.0 percent annual rate. The recent job cuts announced at Microsoft and Starbucks will not help the situation in Seattle.

There is little evidence of any bottom in sight in any of these markets. There continues to be an enormous glut of unsold properties which is being continually refreshed by new rounds of foreclosures. The December data on existing homes sales did show an encouraging drop in inventories of 490,000 homes in December, but it is not clear how much of this decline is real. RealtyTrac recently did a survey of the foreclosed properties in its databases and found that only one-third were in the multiple listing service (MLS) that is used to calculate the inventory of existing homes for sale. This means that the inventory of existing homes for sale may be understated by as much as 500,000.

The only slightly encouraging news in the recent home price data is the relatively modest decline shown for prices in Cleveland. House prices in the city fell by 1.2 percent in November and have fallen at a 10.8 percent annual rate over the last quarter. Given the sharp declines in prices elsewhere and the weakness of the area’s economy, the relatively modest price drops in Cleveland can be taken as some evidence that prices are stabilizing in this market.

For the country as a whole there seems little hope that house prices will stabilize any time soon. With the pace of job loss accelerating, the number of people in a position to buy a new home will be dropping even as new homes continue to get placed on the market.

It is important to remember that the price data in this release is already very dated. The prices are recorded when a home is sold. The period between contracting and sales is typically 6 to 8 weeks, which means that the contracts whose sales prices are reflected in the November release were signed in the period from August to October. (The series averages three months of sales data).


Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.