July 30, 2008 (Housing Market Monitor)

Housing Market Monitor

Rate of Price Decline Slows

July 30, 2008

By Dean Baker

"Bottom third of housing prices in the DC area fell at a 35.8 percent annual rate over the last three months."

The Case-Shiller indices released yesterday provided some evidence that the free fall in the housing market may be coming to an end. The rate of nominal monthly price decline in the 20-City Index fell to 0.9 percent, the slowest rate since last September. (The cities refer to metropolitan areas.) This is still a very rapid rate of price decline, especially in a context of 0.4 percent monthly inflation. However, it is a considerably slower than the pace of price decline in the period from November to March, when the index showed a drop of more than 2.0 every month.  

There continues to be large differences across cities. Prices in many former bubble markets continue to tumble. Prices in Los Angeles, Phoenix, and Miami fell 1.9 percent, 2.5 percent, and 3.6 percent, respectively. Over the last three months, prices in these cities have fallen at respective annual rates of 27.0 percent, 31.2 percent, and 39.2 percent. Prices in these markets are still plunging and will almost certainly continue to fall through 2008 and into 2009.

On the other side, prices rose in 7 of the 20 markets, with Boston, Charlotte, and Dallas all showing increases of more than 1.0 percent for the month. Prices in the Dallas area have risen at a 13.8 percent annual rate over the last three months.

Some of these price rises should not be surprising. Prices in Dallas never got too far out of line with inflation; their current level is slightly lower in real terms than in 2000, when the Case-Shiller index first began to track Dallas. In addition, soaring oil and gas prices are keeping the economy in the area strong.

The price rise in Boston may be a bit harder to explain. While nominal prices are down more than 10 percent from their peak in 2006, they are still almost double their level of a decade ago. Since this is an area that has added very few jobs over this period and had some of the highest housing prices in the country even before the run-up, it is difficult to see how these price increases can be maintained in the long-run.

The housing market continues to show sharp differences by segment, with the bottom third doing far worse in many areas. In Los Angeles, prices in the bottom tier fell by 4.2 percent rate in May and have fallen at a 46.1 percent annual rate over the last three months. In Miami, prices in the bottom tier fell 6.0 percent in May and have fallen at a 57.0 percent annual rate over the last three months. Prices in the bottom tier in the Washington area fell 3.8 percent in May and have fallen at a 35.8 percent annual rate in the last three months.

Interestingly, prices in the bottom tier in Cleveland continue their rebound, suggesting that last month’s number was not a fluke. Prices of homes in the bottom tier in Cleveland rose 11.6 percent in May and have risen at a 7.3 percent annual rate over the last three months. It is likely that this market has hit bottom and that speculators are starting to put some upward pressure on house prices.

The Mortgage Bankers Association (MBA) applications index again showed sharp decline in applications for both refinancing and purchase mortgages. The refinancing index fell by 22.9 percent, while the purchase index dropped 7.8 percent. The purchase index now stands at 309.4, by far the lowest level of the year.

Again, it is difficult to make good comparisons with this index, because many applications are now rejected, which would not have been true a couple of years ago. Also, the loss of subprime lenders (who were less likely to be in the MBA), likely skews the index upward because it shifts mortgages to MBA members. However, these factors would both tend to push the MBA index upward. The sharp drops in applications over the last two weeks could mean that the buy side of the market is weakening even further.

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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