Shiller: Single-family Housing Market is “Grim”

Data through October 2007 for the Case-Shiller Home Price Indices fell 6.1% year over year, showing broadbased declines in the prices of existing single family homes across the United States.

This marks the 10th consecutive month of negative annual returns, and the 23rd consecutive month of decelerating returns. This was the biggest decline in this down cycle as prices fell 1.42% sequentially.

The biggest decline was in San Diego, and smallest drop was in Portland. (NY had the 2nd smallest fall). Miami, Phoenix, Las Vegas, L.A. and San Francisco had amongst the biggest price declines. This is consistent with the reversal of those regions that had the largest increases during the boom times.

Our man Robert J. Shiller says:

“No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim. Not only did the 10-City Composite post a record low in its annual growth rate, but 11 of the 20 metro areas did the same.

If you look at the monthly figures, every MSA went down in both October and September. Eleven of the 20 MSAs, in addition to the two composites, recorded their single largest monthly decline on record in October. For both the 10-City and 20-City composites this was a decline of 1.4% over September”

Ouch. The chart is no prettier:

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click for larger chart:

Case_shiller_october_2007
Chart courtesy of Standard & Poor’s

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Source:

Broadbased, Record Declines in Home Prices in October According to the S&P/Case-Shiller® Home Price Indices
Dec 26, 2007 09:00 AM EST PDF
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_122622.pdf

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What's been said:

Discussions found on the web:
  1. Ross commented on Dec 26

    Will the inmates riot?

    Being a prisoner in your own home might be a fun theme for a new board game. “I can’t refi, I can’t pull out equity, I can’t sell and those pesky taxes and insurance premiums are eating (literally) my lunch!”

    Forget the job offer in the next State. I can’t sell this house!

    Them that was flipping houses will be condemed to flippen burgers. To paraphrase the reporter at the Hindenburg disaster “OH THE INHUMANITY”.

    But then again “who knew?”

  2. michael schumacher commented on Dec 26

    Where is Hanky-Poo and his latest bottom call??? Gotta keep the streak going ……we need to see 10 consecutive months of total talking from the ass region….

    Ciao
    MS

  3. D H commented on Dec 26

    This is one of the four main pieces of bad news that will keep the S&P from rallying longer and stronger. The other three are consumer spending (if final tallies are weak), commercial real estate (if CMBS starts to look like subprime paper) and jobs (if financials slash tons of jobs after the new year).

  4. Jeremiah commented on Dec 26

    FTA: “No matter how you look at these data, it is obvious that the current state of the single-family housing market remains grim.”

    I do not understand this sentence.

    Why use the word “grim?” Who’s perspective is he taking here? Investors?

    Because, as someone who’s (hopefully) entering the market as a buyer, I see anything but “grim.” In fact, I see brighter prospects in the future, because homes are becoming…..ohhhh, what’s the word…

    ….**AFFORDABLE***.

    So again, I wonder: Why is this “grim?”

  5. michael schumacher commented on Dec 26

    It’s grim if you are a bank that is seeing your assets depreciate ALOT faster than they appreciated.

    But yes I do see the irony of that…..alot like reporting the bailout of MBI as an “investment”

    I know what gold and the dollar are saying today and they are not in agreement with the “happy” news (or what is presented to us as “happy”)

    Like Merill selling watches to cushion yet another “one-time” charge.

    Honestly I think a nuclear bomb could go off and the market would see it as “hey the worst is over”….just like “it’s contained”

    Ciao
    MS

  6. Ross commented on Dec 26

    Jeremiah has an excellent point. Houses are selling for replacement cost and maybe even under in distressed markets.
    I plan to build my last house in the Fall of 08. I figure labour will be friendly, material costs less, and there are still idiots that will lend me $1,000,000 at 7% for 30 years! Gee, by then my loan may even be ‘conforming’. Plus, my Federable Gummit will allow me a tax deduction on the full amount of interest paid!
    My main point is this. Over the next 2 to 3 years, buy or build your dream home. It will be a great long term investment plus you get to live there.

    Great old movie with Cary Grant and Myrna Loy. “MR. BLANDINGS BUILDS HIS DREAM HOME”
    The funny part of the movie is putting 1948 dollars in perspective. Mr. Blandings spent $35,000 for a home in Conn. with 3 bdrms, 3 baths on 30+ acres. Now THAT’S value!

  7. grodge commented on Dec 26

    Deflationary spiral in housing.

    Does this offset the inflation in consumables?

    What is an investor to do?

    Mish at global economic analysis has a great post dissecting the various factors in play.

    http://tinyurl.com/38jkkn

  8. halbhh commented on Dec 26

    Definitely more good news in house prices.

    It will be a natural bottom when the median prices (for the nation) have returned back into that natural range, which is something a lot more like 2.5x to 2.8x median family income.

    But will the market be allowed to operate in that natural healthy manner, or will politians re-enact the tradegy-of-the-commons for the n-th time? (And could “Japan” become a catch phrase to help stop them?)

  9. Lord commented on Dec 26

    Less grim than illiquid. The only ones selling these days are the desperate.

  10. MAX commented on Dec 26

    I have seen the data, and have followed this housing bust all the way- and can see the consumer led recession happening, now!
    But wall street doesnt care- the market continues to go up!! maybe Europeans are right what they say about Americans- that we are totally stupid!!

  11. michael schumacher commented on Dec 26

    CNBC speculating that Merril will have another “one-time charge”

    Could be $7 billion……could be more…

    “one time charge”

    Just like Volatility has replaced the word “loss”

    Ciao
    MS

  12. Al Czervik commented on Dec 26

    “It will be a natural bottom when the median prices (for the nation) have returned back into that natural range, which is something a lot more like 2.5x to 2.8x median family income.”

    Posted by: halbhh | Dec 26, 2007 11:49:44 AM

    True enough I suppose. But something’s different this time. In the past, falling prices would usually meet up with rising incomes at some point. But with real income falling for most Americans these days, does that mean that home prices will instead have to chase incomes down this time around? If so, wouldn’t that tend to extend the extent and/or duration of the decline?

  13. halbhh commented on Dec 26

    Al, it’s certainly right to think that if during this decline, house prices will be quite sensitive to income trends. Not least simply because in the group psychology of the media reporting, it’s very likely we will hear the mention of price/income ratios plenty of times, and so this meme will play a part.

  14. Richard commented on Dec 26

    >>It will be a natural bottom when the median prices (for the nation) have returned back into that natural range, which is something a lot more like 2.5x to 2.8x median family income.

    no chance. the products have ‘evolved’ so now a borrower can push their stupidity much farther.

  15. Eric Davis commented on Dec 26

    The deflation-inflation argument, is definitely an interest of mine….

    Though housing can be seen as deflationary and extending broader credit by the lender of first resort, as inflationary.

    The problem is if you set off more inflation in commodities, trying to offset housing depreciation, are you doing more damage than good?

    I read that
    mish global economic analysis, though I’m always sceptical of schiff, and think he lends himself to hyperbole and extremism..
    There were some very ridiculous things being stated in that “Article” by “mish”.

    I find the only people who say “There is no danger in lowering interest rates” are disingenuous libertarians that are short the dollar and long gold.

    A little catch 22 in the whole inflation deflation argument… if the fed set off the “Deflation” in housing with the interest rates at 1% for to long….. Why wouldn’t moving rates back to 1% just set off more deflation….

    Also, Japan moved rates back to 1% to offset deflation, and that economy still hasn’t recovered… and may never recover.

    One of my own personal themes is that the fed and our economy need to encourage savings and not spending. It’s not the banks that loan money, its me…. I save and then the banks loan out my money… But why save if my cash depreciates faster than a big screen TV.

    but how do you do this??? get the interest rates above inflation…. Real Inflation.

    In fact the only useful way to use credit is to stop any need to hold cash in a bank. And that is the Catch 22 the banks and the fed face…..
    are they morons? or is it as the paranoid side of me says and they just playing a suckers game and trying to create economic havoc…

    I don’t know…but I’m placing my bets…

    is it housing deflation or housing depreciation?

    Commodities inflation, or dollar depreciation?

    Fun fun fun….
    immovable object irresistible force

  16. VJ commented on Dec 26

    Ross,

    Being a prisoner in your own home might be a fun theme for a new board game. ‘I can’t refi, I can’t pull out equity, I can’t sell and those pesky taxes and insurance premiums are eating (literally) my lunch!’ Forget the job offer in the next State. I can’t sell this house!

    Ever see Jack Lemon’s “Save the Tiger” ?

    ~

    Great old movie with Cary Grant and Myrna Loy. ‘MR. BLANDINGS BUILDS HIS DREAM HOME’

    One of my all time favorite films. One of my local TV affiliates aired it annually during the New Years weekend for years and years.

    If you ain’t eatin’ Wham, you ain’t eatin’ ham
    .

  17. EF commented on Dec 26

    I’m with D. H.

    “Why use the word “grim?” Who’s perspective is he taking here? Investors?”

    These are good times for many, very good times.

  18. VJ commented on Dec 26

    Jeremiah,

    Because, as someone who’s (hopefully) entering the market as a buyer, I see anything but ‘grim.’ In fact, I see brighter prospects in the future, because homes are becoming…..ohhhh, what’s the word….**AFFORDABLE***.

    One could have made that observation months ago, yet house values have continued to decline. As Robert Toll, the CEO of Toll Brothers, the largest builder of luxury homes in the country stated:

    Right now I think it takes a brave soul to buy a house because there’s so much chatter about housing prices continuing to drop

    Since when does a home builder tell you it’s not a good time to buy a house ? Can you imagine General Motors saying that it’s not a good time to buy a vehicle ?
    .

  19. Eric Davis commented on Dec 26

    Someone made a very clear point about housing this morning.

    “People are buying homes as investments. Why would they buy an investment that over the next year or few years is likly to decline in value?”

  20. michael schumacher commented on Dec 26

    Inventory,inventory, inventory

    Did I mention INVENTORY!!!!!!!!!

    That is what will drive housing prices, not income ratios, perceived bottoms, interest rate cuts or ANY-FRIGGIN-THING ELSE.

    No matter what the market does you can’t escape the fact that inventory is at record levels. Do something about that and you have a start…..but not much else.

    BTW nice painting of the tape with 10 minutes to go, this market is utterly afraid of a negative close.

    Ciao
    MS

  21. Pat Gorup commented on Dec 26

    The “Case-Shiller Home Price Indices fell 6.1% year over year”. I’m fairly confident that number doesn’t take into account ALL of the special cash incentives given buyers by real estate agents to sell homes. Because that information is not reported it makes the 6.1% number unreliable.

  22. PTodd commented on Dec 26

    So maybe we are at April 1991. May 1991 was the beginning of a 15 year period of higher home prices.

    If adjusted for real inflation, and not the fraudulent CPI, housing prices have simply kept up with inflation. The housing bubble is a myth.

    Unfortunately, banks decided to issue mortgages that would allow them to profit despite 10% foreclosure rates on sub-primes, and since peoples income has not kept up with real inflation, they can no longer pay their mortgages, sub-prime or regular. A number of loans had been made to illegal aliens, which is why we can not deport them, they are a bank asset.

    So as more foreclosed houses enter the market, housing prices will lower to the point where people can afford them, including more illegal aliens. In the meantime, the rental market should heat up.

    The only time housing deflates below what they are worth is in a depression. Welcome to the 21st centuries first depression.

  23. alex norman commented on Dec 26

    Mr. Schumacher has it right. Inventory — ie Supply (and future supply in the process of being built), is the thing.

    Real Estate, both CRE and Housing, is an illiquid asset, and as a result the key to understanding any investment, after location, location, location, is: supply, supply, supply.

    In terms of housing, Ara Hovanian stated recently that in certain markets they have ALREADY cut prices for new homes by 35%. The reason why he believes the markets are not moving is that most of the marginal sellers are existing homeowners who are loath to take a loss and have yet to cut their prices.

    The builders’ collective problem is that they have to keep adding to supply to liquidate their existing land purchases. They can’t clear the market because of the homeowners who can’t or won’t sell. So the supply keeps getting bigger and bigger.

    If Krugman’s estimate that this time around the national bubble resembles the So Cal bubble from 1990, and prices will fall 30% NATIONALLY, then he believes that 20 M households, or 40% of all homeowners in the US, will have negative equity.

    This is truly a frightening thought and if it happens it is hard not to imagine a recession.

    The key to buying any RE asset at this point in the cycle is understanding the supply dynamics. If you are in a sub-market where there is a lot of truly substitutional supply coming on line, then wait (if you can).

    In terms of CRE, there will always be less supply than demand for A assets in core markets. There simply are not that many properties which transact relative to the amount of money looking to buy them. That is why most CRE players believe that cap rates for core assets are not going up that much regardless of the credit crunch. There are enough cash buyers out there.

    Back to housing in general, this cycle will not hit bottom until the builders stop building, and the banks recognize ALL their losses.

  24. k.w. commented on Dec 27

    Regarding the grim/not grim discussion. Such a dichotomy is not so unusual, really. Just like when a company cuts thousands of jobs and the stock rallies on the news. Good for investors, but kind of grim for them whats losin’ their jobs.

  25. justin commented on Dec 27

    alex norman, are you suggesting that cre (“commercial real-estate,” for the uninitiated), is not under pricing pressure? According to what I have been reading/researching, that is the next eminent shoe to drop. And rightly so, all the cheap money has created a bubble on every university campus in the country, how many new libraries, observatories, and dorms are needed? This real estate thing only gets uglier.

  26. justin commented on Dec 27

    Just think of the unemployment numbers once the commercial construction people start getting recorded in the numbers? Which should start happening about the first quarter of “08.

  27. alex commented on Dec 27

    Justin–

    I hope I didn’t appear too bullish on CRE. I was specifically referring to A+ assets in Core markets. There is a great deal of institutional money out there looking to buy such assets and buyers can and will pay cash.

    That said, in general CRE is absolutely under pricing pressure. I expect assets to re-priced downward 10-20% this year on the basis of cost of capital (ie risk being repriced) alone.

    Whether or not specific CRE assets experience greater or lesser price depreciation depends on type of asset, market, submarket, and how much leverage the purchaser used.

    To your point, I think that the potential for greatest losses are for raw land bought at bubble prices (post 2003), as well as for new construction in areas with low barrier to entry that have been overbuilt.

    For new construction I think the fundamentals will look the same as with residential housing. The amount of losses will depend on how much the credit/housing bubble impacts the economy as a whole as well as specifically in the sub-market.

    As far as existing assets go, much has been discussed about the extreme leverage and underpricing of risk in deals involving the EOP assets purchased by Blackstone. Whether its Tishman Speyer in Chicago, Macklowe in NYC, or Maguire in OC, all these major players bought office buildings “priced to perfection” with pro-formas showing the most optimistic rent growth/lease turnover imaginable. These deals are going to show losses even if the underlying real estate performs ok. However, many of these buildings have tenants in the financial sector. And we all know what has been happening to finance firms recently (except GS, of course)…

    Alex

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