April 29, 2009 (Housing Market Monitor)

House Prices Continue to Drop at More Than a 20 Percent Annual Rate

By Dean Baker

April 29, 2009

At the current rate of price decline, the bubble will be deflated by the end of 2009.

The February Case-Shiller 20-city index showed that prices dropped by 1.9 percent in February. This brought the annual rate of price decline over the last quarter to 22.4 percent, up from a 19.6 percent annual rate over the last year.

While prices are still declining at an extremely rapid rate, there is some evidence in the February data that the rate of price decline may finally be slowing. For example, in San Diego, prices fell by just 0.9 percent in February, bringing the annual rate of price decline over the last quarter to 15.6. This is down from a 22.9 percent price decline over the last year.

Similarly, in Los Angeles, prices fell by 1.7 percent in February, bringing the annual rate of decline to 20.2 percent. This compares to a 24.0 percent decline over the last year.

Nominal prices in Los Angeles are now back to their October 2003 level. Nominal house prices in San Diego have fallen back to their September 2002 level. Adjusting for inflation in both cases, prices would be down to mid-2002 and mid-2001 levels, respectively.

In some of the other former bubble cities there is a serious danger of overshooting on the downside. In San Francisco, prices fell by 2.9 percent in February. In Las Vegas, prices dropped by 3.3 percent. Nominal prices in San Francisco are now back to their October 2000 level. Prices in Las Vegas are down to their January 2003 level. At the current rate of price decline, the bubble will have completely deflated in these cities before the end of the year. In Phoenix, prices fell by 3.7 percent in February, pulling prices down to their March 2002 level.

Prices fell by 3.4 percent in Cleveland, bringing the annual rate of price decline to 33.5 percent. House prices fell by 3.3 percent in Detroit in February. They have fallen at an annual rate of 33.3 percent over the last year. Nominal prices have fallen to their February 1999 level in Cleveland and to their February 1996 level in Detroit. The latter implies a real price decline of more than a third since 1996. There has been no comparable downturn in market rents in these areas over this period, suggesting that sale prices are now seriously under-valued.

While the rates of price decline may be leveling off or even slowing in some of the former bubble markets, in some of the markets that have not yet seen large drops in price, the rate of price decline appears to be accelerating. In Seattle and Portland, prices in February fell by 1.3 percent and 1.4 percent, respectively. Over the last quarter, prices in these cities have respectively fallen at 24.6 percent and 19.5 percent annual rates.

Overall, the data in the February report indicate that the bottom to the housing market is nowhere in sight. There is a huge amount of downward momentum in the market. It is not plausible that prices will just switch from dropping at a 20 percent annual rate to being stable. There must be a process of gradual deceleration, which clearly has not yet begun.

Furthermore, there is no evidence of any change in the underlying conditions of supply and demand that must precede any stabilization. While some measures of inventories of unsold homes have declined, inventories remain large by any measure. There is also evidence that a substantial number of new and existing homes have been temporarily pulled off the market, with the intention of putting them up for sale as soon as the market picks up. Vacancy rates for housing overall remain at record levels, although the vacancy rate for housing designated as ownership units has fallen slightly.

With the economy shedding close to 700,000 jobs per month, the demand side of the market is continuing to weaken rapidly. This is compounded by the rapid rate of price decline, which is destroying the equity of current homeowners, thereby making it more difficult for many to raise the money needed for a down payment on a new home.  

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.