The Housing Chronicles Blog: Will the rapid decline in prices bring the bottom sooner?

Wednesday, April 30, 2008

Will the rapid decline in prices bring the bottom sooner?

Hat tip to the excellent L.A. Land blog for this find: According to the Center for Policy and Economic Research, $6 trillion in housing wealth will vaporize in 2008 due to the rapid decline in housing prices, which some argue could help the market finds its natural bottom sooner:

The Case-Shiller data released yesterday indicate the rate of house price decline is accelerating. The 20-city index declined 12.7 percent over the last year, while the 10-city index fell 13.6 percent. However, the annual rate of price decline over the last quarter was 24.9 percent in the 20-city index and 25.8 percent in the 10-city index. At this rate of price decline, the excesses of the housing bubble will have largely disappeared by the end of the year. At the same time, the price decline implies an incredibly rapid loss of wealth. In real terms, the rate of price decline in the 20-city index would imply a loss of almost $6 trillion in real housing wealth over the course of the year, an average of $85,000 per homeowner.

Year over year prices are down by 17.2 percent in San Francisco, 19.4 percent in Los Angeles, and 22.8 percent Las Vegas. Over the last quarter, prices in these cities have declined at annual rates of 26.5 percent, 26.3 percent, and 40.8 percent, respectively. Prices are even falling sharply in less inflated markets. Prices in Boston are down 4.6 percent year over year, in New York by 6.6 percent, and in Washington by 13.0 percent. Over the last quarter, the annual rates of price decline have been 15.9 percent, 11.4 percent, and 26.8 percent, respectively.

The new homes sales data released last Friday are also consistent with the picture shown in the Case-Shiller index. Sales were down by 8.5 percent from the February rate and by 36.6 percent over the last year. The Northeast showed the sharpest decline with March sales down 19.4 percent from February and 64.6 from year ago levels. The weak sales levels in the Northeast were likely in part due to better than usual weather in the prior two months, which may have pulled some March sales forward. An inventory equal to 11 months of sales (which does not include canceled sales of homes that were never occupied) will provide substantial downward pressure on prices going forward. ..

All signs point to a continued sharp decline in the market, which should get us to the bottom sooner...

In the first quarter, the vacancy rate on ownership units hit a record 2.9 percent. Before the recent crash, the vacancy rate on ownership units had never exceeded 1.9 percent. The rental vacancy rate also rose, although at 10.1 percent it is still slightly below the record of 10.4 percent set in the first quarter of 2004. Not surprisingly, the West showed the biggest increase in vacant ownership units, with the rate rising from 2.6 percent last year to 3.2 percent this year. With record vacancy rates, the downward pressure on prices should continue for the foreseeable future.

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