Housing Market Monitor

Price Tumble Accelerates, Home Ownership Plunges

January 30, 2008

By Dean Baker

"The homeownership rate is likely to fall below its 2001 level this year." 

The news on the housing market keeps getting worse. The latest data from Case-Shiller index shows prices dropping even more rapidly; the homeownership rate had a record year over year plunge, and the vacancy rate for ownership units crept back up to its record high. In addition, foreclosure rates soared to yet another record, while housing starts and new homes sales showed record annual slumps for 2007. The housing market is still far from anything resembling a bottom.

The Case-Shiller numbers were by far the most important news for the week. This index is the most carefully constructed measure of house prices available, since it measures the change in prices of homes that have been resold, controlling for changes in the mix of homes. The November data showed house prices in the 20-city index dropping 7.7 percent from last November. However, over the last quarter, prices have been in a virtual free fall.

The index shows prices dropping at a 16.2 percent annual rate for the quarter. This is consistent with the 17.2 percent drop shown in the mean existing home price over the last quarter. (The Case-Shiller index averages prices over three months.) If this rate of price decline is sustained over a year, it implies a loss of housing wealth of $3.2 trillion. (This is a nominal decline, so the real drop is even larger.) If just 10 percent of this loss shows up on the books of financial institutions, the write-downs would be $320 billion, almost four times the size of the write-downs seen to date.

The rate of price decline in many of the former hot markets is truly striking. Over the last quarter prices declined at an 11.2 percent annual rate in Washington, a 16.6 percent annual rate in Tampa, and a 24.5 percent annual rate in Miami. In the west, prices in Los Vegas are dropping at a 24.8 percent rate, in Phoenix at a 24.9 percent rate, in San Francisco at a 22.2 percent rate, in Los Angeles at a 24.7 percent rate and in San Diego at a 27.0 percent rate. 

The housing vacancy data gives no reason to believe that even with these price declines the market is about to level off. The vacancy rate for ownership units edged back up from 2.7 percent to its previous peak of 2.8 percent. Prior to 2004, this measure had never risen above 1.9 percent in any prior housing slump. The rental vacancy rate edged down by 0.2 pp to 9.6 percent. This is down 0.8 pp from the 10.4 percent peak in the first quarter of 2004, but still far higher than previous peaks. There are more than twice as many ownership units as rental units.

The homeownership data showed a 0.4 pp decline from the third quarter and a 1.1 pp decline from the fourth quarter of 2006. The 67.8 percent homeownership rate is the lowest since the second quarter of 2002. With the foreclosure rate hitting a new record in the fourth quarter, up 75 percent from the fourth quarter of 2006 and 35 percent from the third quarter, it is virtually certain that the homeownership rate will continue to fall.

It is very likely that the homeownership rate in 2008 will fall below the 67.5 percent rate at the start of 2001 when President Bush took office.

New home sales dropped 4.7 percent in December, putting them 40.7 percent below their year ago level. For 2007 as a whole, sales were down 26.4 percent from 2006, and 39.7 percent from their 2005 level. Sales in the west were down 49.4 percent from the 2005 level. Housing starts were down 8.1 percent in December and 34.4 percent from December 2006. Starts for the year were down 25.2 percent from 2006 and 33.5 percent from 2005.

The latest data raise the possibility of a sharp quick correction. Plunging house prices and soaring foreclosure rates may cut off the flow of credit to the market, further depressing prices. This would create the basis for a recovery, but the quick loss of $8 trillion in housing wealth will be painful.

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