Housing Prices Still Falling

The April Case/Schiller Index shows that the decline in housing prices is not over yet. The best that can be said is that the rate of decline is slowing.

On a seasonally adjusted basis, the 10-city composite index fell to 151.27, a decline of almost 1.0% from March. On an annualized basis, this is an 11.6% rate of decline. On a year-over-year basis prices are down 18.0%, so the rate of decline was lower in April than earlier in the year, but prices falling at an 11.6% rate hardly seems like a green shoot to me.

The data on the 20-city composite was very similar with a 0.9% monthly decline and a 18.1% year-over-year drop. From the May 2006 peak housing prices are down 33.1% based on the 10-city index and off 32.0% based on the 20-city index.

The graph below (from http://www.calculatedriskblog.com/) shows the monthly rate of change in the 10-city index (annualized) back to the start of its history.

April looks good relative to the prior 6 months when prices were falling at more than a 20% annualized rate. It is still a faster rate of decline than the worst months of the early 1990s downturn, which also was in large part caused by housing finance problems (S&L Crisis).

As the Freddie Mac (FRE - Analyst Report) presentation pointed out yesterday (see Foreclosure Waters Rising Fast), 17% of all homeowners (well, those that have mortgages that Freddie is involved with) owe more on their homes than they are currently worth. An additional 11% have less than 10% equity. Even this much improved rate of decline in April would mean that by the end of the year, most of that 11% would be underwater as well.

The people who are already slightly underwater would be pushed to the point where not ruthlessly defaulting becomes not a mark of honesty and integrity, but of stupidity. It is one thing to stick it out and continue to pay on your mortgage if you house is worth $5,000 less than your mortgage. You signed a contract and you want to honor your commitments. You have ties to that community, and you value your credit rating.

However, when the mortgage is $50,000 or $100,000 more than the house is worth...lets just say everything has its price. Add in loss of income from hours being cut or one or both earners being laid off, and defaults and foreclosures are bound to continue to rise. This means that the pressure on the mortgage related companies, including but not limited to the mortgage insurance companies like MGIC (MTG - Analyst Report) and the banks like Bank of America (BAC - Analyst Report) is not going to let up any time soon.

Even for those that still have substantial equity in their houses, this is a significant loss of wealth for them. For most people, home equity is (or was) a far more important part of their wealth than the stock market.

For years, the housing ATM was a very important source of liquidity to tide people over in rough times. Those days are gone. People are going to have to rebuild their wealth the old fashioned way, but spending less than they earn. We have seen the savings rate shoot up dramatically so far in 2009, but it will have to rise further and stay high for a very long time. This means there will be no big snap back in consumer spending.

While we may get a short term snap back in economic growth from the stimulus spending and from inventory restocking, it will be very anemic and we will fell like we are in a recession for a very long time to come.