January 3, 2012 (Housing Market Monitor)

By Dean Baker

Prices for bottom-tier homes in Atlanta are down 42.7 percent from their tax-credit-driven peak.

There were several positive items reported about the housing market last month. November existing home sales were up 4.0 percent from October to their second-highest figure for the year. Housing starts were up 9.3 percent for their strongest showing of the year. And pending homes sales were up 7.3 percent from an October level that was already the high for the year.

However, there were also some important negative signals in the data. The purchase mortgage application index is running below last year’s levels. And, the Case-Shiller October data indicate that house prices are declining in most parts of the country, possibly at an accelerating rate.

Starting with existing home sales, the November data is somewhat positive but only modestly so. The sales rate is better than the recent past, but the November rate is only 1.8 percent above the year-round average for 2009, which was hardly a banner year. The median house price was down 3.5 percent from its year-ago level. All four regions are seeing a drop in prices; although a November jump in the Northeast (likely an anomaly) brought prices to just 0.1 percent below their year-ago level.

The jump in housing starts was given considerable attention by those seeing signs of an uptick. In fact, the jump was driven almost entirely by an uptick in multi-family units. Starts of single family homes were up by just 2.3 percent from their October level and down by 1.5 percent from the November 2010 level. Starts in multi-family units are always erratic and most of the reported increase was just offsetting a sharp drop reported for October. While housing starts are probably on a positive path, it is likely to be a very gradual uptick over the next couple of years.


Pending home sales numbers were the most positive of the three releases, but even here there are grounds for skepticism. The realtors have been reporting a sharp uptick in canceled contracts. Assuming this continues it would mean that a higher number of contracts may not translate into more sales. It is interesting to note that the November rise in contracts did not coincide with a jump in purchase mortgage applications.

This could suggest an increased role for investors who are not buying homes with conventional mortgages. That may be a necessary part of a market turnaround (investors come in to buy houses where they believe that prices have dipped too far), but it is still far from a normal housing market.

The Case-Shiller 20-City index showed that prices dropped 0.6 percent in October, bringing their annual rate of decline to 6.5 percent over the last three months. Only four of the 20 cities showed price increases for the month.

Atlanta had the sharpest price decline, with a drop of 4.1 percent in October, bringing the rate of price decline over the last three months to 38.2 percent. This price decline was driven by a drop of 9.3 percent in the price of homes in the bottom third of the housing market. Prices for homes in this segment of the market are now down by 38.9 percent from their year-ago level and 42.7 percent from the peak in the summer of 2010 caused by the first-time buyers tax credit.

Other cities with large price declines are Detroit with a drop of 2.1 percent, Minneapolis with 2.0 percent, Las Vegas with 1.9 percent, and Chicago with 1.2 percent. The Detroit figure is probably an anomaly as the city’s market has shown some recent strength. Prices are up 2.5 percent from the year-ago level. The other cities in this group are seeing on-going price declines, with prices in all three cities well below their year-ago levels.

It is also worth noting a 1.0 percent price decline in Los Angeles. Prices in the city have been falling at a 10.6 percent annual rate over the last three months. There is still considerable air in the city’s housing bubble.

In spite of some encouraging signs, prices nationwide are now declining at 4-6 percent annual rate. This will continue well into 2012.