U.S. House Prices still in freefall
It has been a terrible year for U.S. home owners. The Standard & Poor's Case-Shiller 20-City Index, which follows home prices in the 20 largest U.S. cities, has fallen 18% in October, marking a record year-over-year (YOY) decline since its inception in 2000. The Case-Shiller 20-City was down 2.2% in September. Weakness has been widespread with 14 of the 20 metro areas showing record annual declines.
As of October 2008, the 10-City Composite is down 25.0% from its mid-2006 peak, and the 20-City Composite is down 23.4%. Case-Shiller's10-City index fared no better and posted a record 19.1% YOY decline. The 10-City index was off 3.6% from September. Standard & Poor's/Case-Shiller Indices are the key measure of U.S. home prices.
If you are looking to buy a second home in the U.S., areas to look for would be sunny states such as Arizona, Nevada, California and Florida. According to S&P data based on Case-Shiller’s Indices, Phoenix has seen the sharpest fall with a YOY decline of 32.7%, followed by Las Vegas, down 31.7%, and San Francisco, down 31.0%. Miami, Los Angeles, and San Diego have also recorded annual declines of 29.0%, 27.9% and 26.7%, respectively.
The table below shows how each metropolis performed during October 2008. The S&P/Case-Shiller Composite of 10 Home Price Index is a value-weighted average of the 10 original metro area indices. The S&P/Case-Shiller Composite of 20 Home Price Index is a value-weighted average of the 20 metro area indices.
The steepest decline for October was in Detroit, which posted a 4.5% decrease. Detroit is the home for all U.S. automakers and financial worries of the big three automakers have taken a toll on home prices. San Francisco came in second with a 4.2% October decline.
The current home price decline invokes memories of Yale superstar professor and Macro Markets chief economist Robert Shiller and his book “Irrational Exuberance”. Incidentally it was him together with Wellesley College economist Karl Case who developed the Case-Shiller’s Indices.
I was listening to an interview with the man himself. Robert Shiller reckons that the current declines are already approaching those in the Great Depression, which saw a staggering 30% fall. Prices have so far fallen only 20% and there is some more to go. So if you are a fan of Robert Shiller, then hold off, don’t call your American Real Estate Agent as yet.
Painting a gloomier picture is the negative home equity situation in the U.S. Some analysts reckon that as many as 30% of U.S. home owners are in the negative equity territory, which means the market value of the house is less than the outstanding mortgage. No wonder banks are keen to reschedule home loans!
First American CoreLogic, a real estate data company, has found 7.6 million properties in the U.S. are in negative equity as of September 30. The 20 areas hardest hit by this were all in Nevada, California, Florida and Arizona. In Nevada, almost half (48%) of homes were in negative equity according to First American CoreLogic, by far the worst situation of any state in the country. So if you are in a rush to buy a home in the U.S., Nevada is likely to be a better bet. After all Nevada, with Las Vegas as its capital, is known for gambling and casinos (in addition to gold)!
It is not a laughing matter though. Shiller does not think the U.S. property market has seen the bottom. Housing markets do not show a V shape recovery in his view. In other words, we are likely to see further declines in the U.S. property market, with more foreclosures. I would wait a few more months before I call a real estate agent in the U.S.!
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