Home Sales and Prices Continue Downward Path

April 23, 2008

April 23, 2008 (Housing Market Monitor)

Housing Market Monitor

Home Sales and Prices Continue Downward Path

April 23, 2008

By Dean Baker

"The current rate of price decline will deflate the bubble by the end of the year."

Existing home sales fell 2.0 percent in March after a modest upward tick in February. Median and average house prices increased after a sharp reported drop in February, although they are both still far below year ago levels.

Interestingly, the Northeast now appears to be doing substantially better than the other three regions of the country. Sales are only down by 18.8 percent compared to year ago levels, and 22.8 percent compared with the 2005 peak. By comparison, existing home sales nationwide are down by 30.3 percent compared to the 2005 peak.

The difference is even more dramatic on the price side. While median and average prices in other regions are plummeting, they are actually slightly higher year over year in the Northeast.

Part of this story may be attributable to reports of European buyers in the New York real estate market. European investors seem to have an insatiable appetite for throwing away their money in the United States. This dates back to the fortunes lost in the canal building boom in 1837, but more recent manifestations include Daimler Benz’s purchase of Chrysler in 1998 for $40 billion and Duetsche Telekom’s purchase of Voicestream for $50 billion.

According to press accounts, many Europeans are now buying up condominiums in Manhattan as investment properties. Given the sharp drops in employment in Wall Street, these investments are likely to turn out about as well as the Daimler Benz takeover of Chrysler, but for the moment, this is a prop for the New York market.

It is interesting to note how far house prices have already fallen, as we await the release of the February data from the Case-Shiller index. The table below shows how far house prices have fallen in several of the major bubble markets since their peak in July of 2006, as of January 2008. It shows how much they would have fallen by this month, if they continued the rate of decline over the last quarter and how low they would be by next January if they sustain this rate of decline for a full year.

Price Decline from July 2006 

City Jan. 2008 
Apr. 2008 
Jan. 2009  
Boston -8.50% -12.20%  -22.30%
Detroit -18.70% -24.70% -40.20%
Los Angeles -18.10% -27.30% -47.40%
Miami -19.00% -25.30% -41.40%
New York -6.90% -9.20% -15.80%
Phoenix -18.80% -29.00% -48.80%
San Diego -20.70% -27.90% -45.70%
San Francisco -15.50% -23.20% -42.10%
Washington -14.80% -20.30% -34.80%

The good news in this story is that it implies that the correction from the bubble should be over relatively quickly if prices continue to decline at their recent rate, although New York and Boston may have some further room to fall. The bad news is that homeowners will have to adjust to a loss of close to $8 trillion in housing wealth over a period of around 18 months.

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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