September 2011 Case-Shiller Home Price Index Declines 3.6% YoY

Non-seasonally adjusted Case-Shiller home price index (20 cities) for September 2011 (released today) shows a year to date decline of 0.3% and a year-over-year decline of 3.6%. In September 2010, the year-to-date improvement was 0.9%%, and the year-over-year improvement was 0.4%.

The market expected a year-over-year decline of 3.0% decline (versus the 3.6% actual).

All the leading home price indices declined in September. Econintersect will compare all of them in this post, but first the Case-Shiller headlines:

Data through September 2011, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that nationally home prices did not register a significant change in the third quarter of 2011, with the U.S. National Home Price Index up by only 0.1% from its second quarter level. The national index posted an annual decline of 3.9%, an improvement over the 5.8% decline posted in the second quarter. Nationally, home prices are back to their first quarter of 2003 levels.

As of September 2011, the annual rate of change in 14 of the 20 MSAs and both Composites, covered by S&P/Case-Shiller Home Price Indices, improved versus August. Atlanta, Las Vegas, Los Angeles, San Francisco, Seattle and Tampa recorded lower annual declines in September compared to August. Detroit and Washington DC were the only two MSAs to post positive annual rates of +3.7% and +1.0% respectively. Detroit has now recorded three consecutive months of positive annual rates.

Comparing all the home price indices, it needs to be understood each of the indices use a different methodology in compiling their indexes – and no index is perfect. The National Association of Realtors normally shows exaggerated movements which likely is due to inclusion of higher value homes. However, the seasonal downturn began with their August data.

Econintersect is seeing a gentle upward trend in the volumes of sales. This trend is indicating improving dynamics in existing home sales.

A synopsis of Authors of the Leading Indices:

Case Shiller’s David M. Blitzer, Chairman of the Index Committee at S&P Indices sees some hope in the data.

“Home prices drifted lower in September and the third quarter.  The National Index was down 3.9% versus the third quarter of 2010 and up only 0.1% from the previous quarter. Three cities posted new index lows in September 2011 – Atlanta, Las Vegas and Phoenix. Seventeen of the 20 cities and both Composites were down for the month. Over the last year home prices in most cities drifted lower. The plunging collapse of prices seen in 2007-2009 seems to be behind us. Any chance for a sustained recovery will probably need a stronger economy.

“Detroit and Washington DC posted positive annual rates of change and also saw an improvement in these rates compared to August. Only New York, Portland and Washington DC posted positive monthly returns versus August. It is a bit disturbing that we saw three cities post new crisis lows. For the prior three or four months, only Las Vegas was weakening each month. Now Atlanta and Phoenix have fallen to new lows too. On a monthly basis, Atlanta actually posted a record low rate of -5.9% in September over August. The markets are fairly thin, and the relative lack of closed transactions might be exacerbating the downside. The relative good news is that 14 cities saw improvements in their annual rates of change, versus the six that weakened.”

CoreLogic‘s Mark Fleming, chief economist suggests there is a supply – demand mismatch:

“Even with low interest rates, demand for houses remains muted. Home sales are down in September and the inventory of homes for sale remains elevated. Home prices are adjusting to correct for the supply-demand imbalance and we expect declines to continue through the winter. Distressed sales remain a significant share of homes that do sell and are driving home prices overall.”

Lawrence Yun, NAR chief economist commenting on October 2011 data said home sales should be improving – but are not blaming it on several factors.

“Home sales have been stuck in a narrow range despite several improving factors that generally lead to higher home sales such as job creation, rising rents and high affordability conditions. Many people who are attempting to buy homes are thwarted in the process.”

“A higher rate of contract failures has held back a sales recovery. Contract failures reported by NAR members jumped to 33 percent in October from 18 percent in September, and were only 8 percent a year ago, so we should be seeing stronger sales.”

“Other recent factors include disruption in the National Flood Insurance Program, and lower loan limits for conventional mortgages, which paradoxically force some of the most creditworthy consumers to pay unnecessarily higher interest rates.”

Real time data provider Altos Research whose national index is updated through early October 2011 discusses the inventory situation:

The mass liquidation of foreclosure portfolios is best described as a trickle. The inventory is coming on the market slowly as more loans are modified to keep homeowners in their homes. Although the millions of properties in the shadow inventory are still looming, there is nothing that indicates a flood of foreclosures hitting the market anytime soon.

Housing inventory decreased in all the composite markets this month. This is a significant change from last month, when half reported increased inventory and half reported decreased inventory. The decreased inventory follows a seasonal pattern seen every year around this time.

Prices decreased in 16 markets this month (17 markets reported a decrease in prices last month). In the markets that experienced increases in prices, the largest increase was 1.68% in Salt Lake City.

The weekly-sampled inventory and 90-day inventory trend lines are indicating decreasing inventory as we head into the winter months.

LPS Home Price index showed a 1.2% home price decline in September 2011.

Econintersect publishes knowledgeable views of the housing market. The common thread remains that no one is seeing any hard evidence that the general decline in existing home prices is over.

Caveats on the Use of Home Price Indices

The housing price decline seen since 2005 varies by zip code.  Every area of the country has differing characteristics.  Since January 2006, the housing declines in Charlotte and Denver are well less than 10%, while Las Vegas home prices have declined almost 60%.

Each home price index uses a different methodology – and this creates slightly different answers.  However, all are in concert saying that home prices are continuing to decline.

The most broadly based index is the US Federal Housing Finance Agency’s House Price Index (HPI) – a quarterly broad measure of the movement of single-family house prices. This index is a weighted, repeat-sales index on the same properties in 363 metro centers, compared to the 20 cities Case-Shiller.  However, this index is updated only through 2Q2011.

The red line is the HPI index divided by the Consumer Price Index (CPI-U). This division approximates chained dollar look at home prices. Home prices remain 20% above their pre-bubble price levels. In other words, home prices need to fall another 20% to get into the price range enjoyed in the 1980′s – before the effects of the Baby Boomer home price bubble.

Recent review of the Fed 2011 stress tests for banks has a new recession scenario that would see home prices decline another 20% from here.  It is unlikely that the attempts to complete a bottom here could hold under those conditions.

Econintersect analysis of recession indicators is still not seeing the start of new U.S. recession, however.  We can only hope that outlook continues.

One area that has been absent from discussion of home prices recently is the affordability factor. After hearing about how affordable home purchasing had become earlier in the year, the optimism on that front has waned. At the beginning of the year an article at CNN/Money by Nin-Hai Tseng quoted Moody’s Mark Zandi as part of what she wrote:

After declining during the depths of the latest recession, prices for rentals nationwide increased modestly by about 3% in 2010, partly driven by a record number of homeowners looking for new digs after foreclosing on their homes. In Moody’s latest list of rent ratios (which is the price of a typical home divided by the annual cost of renting that home) for 54 U.S. metropolitan areas, 39 fell into the ‘better to rent’ category — roughly the same level it’s been for the past year.

But that may finally be about to change. Moody’s chief economist Mark Zandi expects the trend to reverse this year in many major cities. This would be a positive development, as a healthy housing market typically puts renting and owning at more equal footing.

“By mid 2011 and certainly by end of 2011, buying will be superior to renting in most parts of the country,” Zandi says.

A few factors will be at play.  For one, home prices are expected to fall further, with some economists expecting a 15% to 30% drop this year.  This might be bad news for household finances and current homeowners fearing that their most prized asset stands to lose more in value. On the flip side, this makes homes more affordable and might finally spur more home sales, especially at a time when the rate of home construction has been the lowest since before the Second World War.

It turns out that home prices have declined of the order of 3% in 2011, not up to 30% suggested just eleven months ago. It is still much more beneficial on a cost basis to rent (national average C-S Comp 20) than to buy, as shown in the graph from Calculated Risk.

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