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Tuesday, June 30, 2009

House Prices: The Long Tail

by Calculated Risk on 6/30/2009 02:14:00 PM

First a couple of quotes:

From Bloomberg: Shiller Sees ‘Improvement’ in Rate of Home-Price Drop

Home prices saw a “striking improvement in the rate of decline” in April and trading in funds launched today indicates investors believe the U.S. housing slump is nearing a bottom, said Yale University economist Robert Shiller.

“At this point, people are thinking the fall is over,” Shiller, co-founder of the home price index that bears his name, said in a Bloomberg Radio interview today. “The market is predicting the declines are over.”
“My guess would be that home prices are going to level off -- they’re not going to keep falling,” Shiller said in a separate interview with Bloomberg Television. Still, it’s “hard to predict” a speculative market, and “I am not optimistic that we’re going to see any sharp rebound.”
From the WSJ: Home Prices Drop at Slower Pace
Home prices in 20 major cities fell an average 0.6% in April, an improvement over the 2.2% decline the prior month, according to the Case-Shiller index produced by Standard & Poor's and released Tuesday.
David Blitzer, chairman of S&P's index committee, said in a statement that while "some stabilization may be appearing in some markets," the spring buying season usually helps buoy housing-market activity. "It will take some time to determine if a recovery is really here," he said.
First, the 0.6% decline in the Composite 20 index (mentioned in the WSJ) is the Not Seasonally Adjusted (NSA) index. The NSA index was at 139.97 in March, and 139.18 in April.

The Composite 20 Seasonally Adjusted (SA) index was at 141.36 in March and 140.1 in April - a decline of 0.9% or 10.2% annualized.

So house prices were falling at about a 10% annualized rate in April - and that apparently feels like "stabilization"!

By most measure like price-to-income, price-to-rent and real prices, a large portion of the probable price declines are behind us. See: House Prices: Real Prices, Price-to-Rent, and Price-to-Income Note: that post is based on the quarterly Case-Shiller National price index.

But in many previous housing busts, there was a long tail of smaller price declines (especially in real terms).

Case-Shiller Composite 10 Annualized Change Click on graph for larger image in new window.

This graph shows the annualized rate of change, monthly, for the Case-Shiller Composite 10 SA index.

Note: The Composite 20 index mentioned in the WSJ only goes back to January 2000.

Notice that during the early '90s housing bust, prices fell on and off for a few years after the worst of the price declines were over.

Case-Shiller Composite 10 Real Annualized Change The second graph shows this long tail of price declines in real terms (the composite 20 index adjusted with CPI less Shelter).

I'm not sure we've reached the "long tail" portion of this housing bust yet, but I think that prices will follow a similar pattern as previous busts, with prices falling in real terms for a few years after the worst of the price declines are over.

With record delinquencies, record foreclosures, few move-up buyers (impacting the mid-to-high end), a huge overhang of inventory, I believe prices will continue to fall in many areas.