Housing Market Monitor by Dean Baker

For Immediate Release: January 30, 2008
Contact: Alan Barber, (202) 293-5380 x115

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.