How Bad Is Housing?

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• The Wall Street Journal – Housing Imperils Recovery

Home prices have sunk to 2002 levels, effectively wiping out almost a decade’s worth of home equity across the U.S. and imperiling the fragile economic recovery as Americans confront the falling value of their biggest investment. A closely watched home-price index released Tuesday, the S&P/Case-Shiller National Index, showed that prices nationwide fell 4.2% in the first quarter after declining 3.6% in the fourth quarter of 2010. The index had seen increases in 2009 and early 2010.”Home prices continue on their downward spiral with no relief in sight,” said David M. Blitzer, chairman of S&P’s index committee. The report signals “a double dip in home prices across much of the nation,” he said. That doesn’t bode well for the economy, which historically has depended on home buying and other consumer spending to rebound. Falling prices hurt economic growth in a number of ways. Not only do homebuyers curb spending when their homes are losing value, but continued price erosion keeps families stuck in homes they can’t sell because they are worth less than what they owe.

• The Associated Press – Cities that weathered housing bust now suffering

Home prices in big metro areas have sunk to their lowest since 2002, the Standard & Poor’s/Case-Shiller 20-city monthly index showed Tuesday. Since the bubble burst in 2006, prices have fallen more than they did during the Great Depression. The index, which covers metro areas that include about 70 percent of U.S. households, is updated every quarter and provides a three-month average. The March data is the latest available. Foreclosures have forced prices down so much that some middle-class neighborhoods have turned into lower-income areas within months. Prices are expected to keep falling until the glut of foreclosures for sale is reduced, companies start hiring in greater force, banks ease lending rules and more people think it makes sense again to buy a house. In some markets, that could take years. The latest report points to a “double dip in home prices across much of the nation,” said David Blitzer, chairman of the Index Committee at Standard & Poor’s.

Comment
The chart above shows the Case/Shiller Index is at its lowest level since 2003, not its lowest level since 2002 as noted above.  Either way, house prices are extremely depressed.

The Wall Journal

• Five Questions on Tuesday’s S&P/Case-Shiller

Why is housing still so weak?
Many households can’t move because they owe more than their homes are worth. Even households that aren’t underwater have seen such a big loss of wealth that they may be unwilling to sell at current prices. Credit also remains tight. While mortgage rates are low, borrowers that don’t have perfect credit and that can’t make a 20% down payment often aren’t going to qualify for the lowest rates. Insurance premiums on loans backed by the Federal Housing Administration, which allows down payments as low as 3.5%, have risen twice in the last year. And banks are scrutinizing borrowers’ incomes and tax returns, looking for any possible red flag. Many buyers aren’t willing to buy unless sellers give a decent discount—call it insurance against future price declines. Sellers already think they’re giving away the store, and may balk at further price cuts. Against this backdrop of anemic demand, the supply of homes is high as banks push more foreclosed properties onto the market. Banks are less reluctant to cut prices to unload homes quickly than traditional sellers, and because those homes sometimes require more work, they tend to sell for less. Many of those homes are being sold at discounts to investors that are willing to make all-cash bids, which can reduce the appraised value of all homes in that neighborhood.

The New York Times:

•  Bottom May Be Near for Slide in Housing
For real estate, some economists say, an end to the seemingly endless decline in housing values might be in sight.Not immediately. At the moment, prices are still dropping. In 20 large cities, prices fell 0.8 percent in March from the previous month, according to the Standard & Poor’s Case-Shiller Home Price Index released Tuesday. That pushed the closely watched index below its level of two years ago to a new post-bubble low, and put it 33.1 percent under its July 2006 peak. Few analysts expect housing prices to rebound anytime soon. But quite a few are predicting that the market is close to the moment when things will stop getting worse, which will be a major improvement all by itself. “By far the bulk of the downturn of housing prices is beyond us,” said Paul Dales of Capital Economics. He expects the market to slip 5 percent further, slightly more than he was expecting a few months ago. “There are some amazingly favorable signs. Housing is the most undervalued it’s been in 35 years,” Mr. Dales said. “At some point, it’s going to do very well.”

Comment
Many stories are noting that the current housing decline is greater than the decline of the Great Depression.  This comes from the Case/Shiller Annual Index which goes back to 1890.  Case/Shiller used the Grebler-Blank-Winnick data from 1890 to 1947 (explanation, data).   This data shows home prices fell 30% during the Great Depression (1925 to 1933) and the median price of a Washington DC home fell 27% over the same period.  So, while Barry Ritholtz’s Big Picture post below is conceptually correct to point out that every other price index fell 75% to 90% during the Great Depression, Grebler-Blank-Winnick’s housing data from that period does not show house prices fell to quite that extent.