February 27, 2008 (Housing Market Monitor)

Housing Market Monitor

Price Declines Continue at Rapid Pace 

February 27, 2008

By Dean Baker

"For the first time, the ratio of home equity to value is below 50 percent." 

The January data from the Case-Shiller index showed house prices falling in all of the 20 cities covered. Seventeen of the twenty cities also showed year over year price declines (Charlotte, Portland, and Seattle were the exceptions). The 20-city index is down 9.1 percent year over year. Over the last quarter, it has fallen at a 15.8 percent annual rate. The biggest price declines were in Las Vegas and Phoenix, both of which had year over year price decline of 15.3 percent, and Miami, which had a 17.5 percent price decline. Over the last quarter, house prices in these cities declined at annual rates of 24.2 percent, 24.3 percent, and 27.2 percent, respectively.

The OFHEO House Price Index also showed prices dropping, although by a much more modest 0.3 percent year over year. The difference between the indices is most likely attributable to the fact that the OFHEO index only covers conformable mortgages. That means that it excludes large portions of the market in the cities with high priced homes and rapidly declining prices, like San Diego, Miami, and San Francisco. The 1.3 percent decline in the OFHEO index from the third to the fourth quarter means that the Fed will report in the 4th quarter Flow of Funds release next week that the equity to value ratio fell under 50 percent for the first time in history.   

There is little reason to believe that the rapid pace of price decline will slow any time soon. RealtyTrac reported that there were 233,000 foreclosures filings in January - a 57 percent increase from last year and an 8 percent increase from December. This comes to 2.8 million foreclosures at an annual rate. While not all of these foreclosures will result in a home being placed on the market, the vast majority will, ensuring that the supply of homes for sale will remain substantial no matter how much builders cut back and homeowners put off their sales plans. In fact, the year over year increase probably understates the actual increase in foreclosed homes being put on the market, since holders of secondary mortgages no longer bother filing for foreclosure (They usually would get no money because the house has fallen in value too much.)

While the record foreclosure rate will ensure that there is a substantial supply of homes on the market, the growing weakness of the job market, coupled with tightening credit, will constrain the demand side. The Fed’s efforts to stimulate the economy by lowering the federal funds rate just seems to be pushing long-term rates higher. The Mortgage Bankers Association (MBA) reported that the average interest rate on a 30-year fixed rate mortgage rose to 6.27 percent last week from 6.09 percent the prior week. The 30-year rate had been as low as 5.35 in early January before the Fed’s last two rate cuts.

This increase in interest rates has had a huge impact on refinancing. The MBA applications index for refinanced loans has fallen by more than 50 percent in four weeks from 5,103.6 in late January to 2,458.9 in the data released today.

Both new and existing home sales continued to decline in January. The decline in new home sales was sharper, with a 2.8 percent drop from December and a 33.9 percent year over year decline. The January sales rate was down 54.2 percent from the 2005 rate.

Existing home sales were down 0.4 percent for the month and 23.4 percent year over year. It is worth remembering the new home figures give a more current measure of the market, since it measures contracts signed in January. The existing homes data refer to closings on homes in January. Most of these contracts were signed in December or even November. The inventory of unsold new homes rose to 9.9 months of sales, the highest level since October of 1981, and the median price plummeted to $216,000, 15.1 percent below the year ago level.

There is no reason to believe that the decline in house prices will end any time soon. In fact, with rising foreclosures, tightening credit, and a weakening job market it is likely that it will accelerate.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net). CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.

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