Vacancies Remain at Record Levels; House Prices Fall Again

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October 29, 2008 (Housing Market Monitor)

Vacancies Remain at Record Levels; House Prices Fall Again

The bubble should be fully deflated by the middle of next year.

The Census Bureau reported that the vacancy rate for ownership units remained at a record 2.8 percent. By region, there was a 0.3 percentage point year over year increase in the vacancy rate for ownership units in both the West and the Midwest. The vacancy rate for rental units also inched up slightly on a year-over-year basis, although the 9.9 percent 3rd quarter rate was slightly lower than the 10.1 percent peak in the first quarter.

The Census data also show that the homeownership rate is continuing to decline. The seasonally adjusted rate fell by 0.3 percentage points to 67.8 percent, the same rate as in the second quarter of 2001.

The August Case-Shiller price data show that rapid price declines are continuing in many of the former bubble markets. Prices fell by 1.8 percent last month in both San Diego and Los Angeles, 2.9 percent in Phoenix and 3.5 percent in San Francisco. Over the last quarter, prices have fallen at an 18.6 percent annual rate in Miami, a 25.0 percent annual rate in San Francisco, and a 28.2 percent annual rate in Phoenix.

Boston and Cleveland were the only cities showing price increases in August, with Boston’s index rising by 0.1 percent and Cleveland’s rising by 1.1 percent. The latter is especially encouraging, since it suggests that Cleveland’s market may have finally turned the corner after falling sharply. Prices have risen at a 6.2 percent annual rate over the last quarter.

The 20-city index fell by 1.0 percent in August. It has declined at a 9.2 percent annual rate over the last quarter and has fallen by a total of 21.3 percent in nominal terms since its peak in June of 2006. This translates into a real decline of just under 30 percent.

Some analysts have noted the rise in new and existing home sales for September and held them up as evidence of a market turnaround. This is almost certainly not the case. The 5.5 percent rise in existing home sales was driven almost entirely by a 16.8 percent increase in sales in the West (the West accounts for roughly 25 percent of all sales at present). The jump in sales was, in turn, accompanied by a 10.1 percent drop in median house prices from July levels.

Clearly, the sales jump is the result of the sale of foreclosed properties and other distress sales. While this is a necessary part of the adjustment process, it should not be confused with an increase in demand.

With the employment picture turning bleaker and the plunge in the stock market, it is almost certain that the housing market will turn even more negative in the months ahead. The tens of millions of workers who are now fearful about their future job prospects will be very reluctant to buy a new home. Similarly, the loss of trillions of dollars of stock wealth will make many households much more cautious in all their expenditures.

The loss of stock wealth is also likely to have a more direct effect on the housing market. It is already the case that many existing homeowners will have difficulty buying a new house because they don’t have enough equity in their current home to make a down payment on a new home. In many cases, stock wealth (either owned directly or by a parent) might have been an alternative source of money for a down payment. With the stock market down by 40 percent from its peaks last fall, many fewer families will have the stock wealth needed to make a down payment.   

Given the overall shape of recent economic data, it is more likely that the rate of price decline will accelerate in the next few months than decelerate. Prices still must fall by around 10 to 15 percent in real terms to return to trend levels. This can be reached by the middle of 2009 at the recent rate of price decline. The question is whether the markets will overshoot on the downside.


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.