Case Shiller Data Implies Next Housing Price Leg Down Is Underway

Unfolding housing data continues to confirm that a second dip in residential home prices is underway.  The Case-Shiller data for September 2010 headlined:

Data through September 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined 2.0% in the third quarter of 2010, after having risen 4.7% in the second quarter. Nationally, home prices are 1.5% below their year-earlier levels. In September, 18 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down; and only the two composites and five MSAs showed year-over-year gains. While housing prices are still above their spring 2009 lows, the end of the tax incentives and still active foreclosures appear to be weighing down the market.

The chart above depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 1.5% decline in the third quarter of 2010 over the third quarter of 2009. In September, the 10-City and 20-City Composites recorded annual returns of +1.6% and +0.6%, respectively. These two indices are reported at a monthly frequency and September was the fourth consecutive month where the annual growth rates moderated from their prior month’s pace, confirming a clear deceleration in home price returns. The 10-City Composite posted a +1.6% annual growth rate in September, versus the +5.4% reported four months prior in May, and the 20-City Composite was up 0.6%, versus its +4.6% May print.

More telling in the data release was part of the accompanying statement from David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.

“Another weak report; weaker than last month. The national index is down 1.5% from the third quarter of last year and 15 of 20 cities are down over the last 12 months. Other than Tampa, FL, there are no new lows this month but many analysts will argue that a double dip will be confirmed before Spring.  While some of the bad numbers may reflect the end of the government’s tax incentive for first time homebuyers, there are other problems weighing on the housing market.  The national economy is certainly the number one issue for housing. Additionally, there is a large supply of houses on the market and further, hidden, supply due to delinquent mortgages, pending foreclosures or vacant homes. New construction is running at less than half the pace needed to meet normal demand, so a sustained recovery could be a ways off.”

Econintersect has argued a second dip in the housing crisis was coming as the original decline was interrupted by government incentives which did little to cure the underlying dynamics which was causing the housing decline.  Earlier this month, the National Association of Realtors (NAR) October house price data was released (analysis here).  The NAR and Case Shiller data has been following the same trend lines.

Case-Shiller only uses home sales in its analysis where previous home sales data is available.  The NAR uses all home sales in its analysis.  Econintersect believes both methodologies are acceptable.  It is necessary to recognize the noise factors in these numbers, however.  Case-Shiller is reported as a 3-month moving average and the NAR data is reported as single month data (the graph above converted the NAR data into a 3 month moving average for comparison purposes).

Other recent releases foretell a decline in the Case-Shiller data in the months to come.  CoreLogic in their U.S. Housing and Mortgage Trends November 2010 report argues that this downward price trend will continue.  One of the major causes, in their opinion, is the downward dynamics being cause by the foreclosure market.

Econintersect believes that when the volume of home sales decline to the levels of today, the laws of supply and demand govern.  The USA has too many homes, and not enough buyers.  This allows the dynamic caused by the foreclosure market which must sell to begin to govern the housing prices.

The downward price dynamic will continue until the market demand returns.  The key for increasing demand is growing employment.  In the past, housing has helped turn employment around.  In the current situation it may be that employment growth will be needed first in order to restart the housing market.

Related Articles

New Home Sales At Historic Lows in October 2010  by Steven Hansen

Realtors Understate Existing Home Sales Decline  by Steven Hansen

Residential Building Remains in Depression  by Steven Hansen

The Great Debate©:  Residential Construction is Dead – Or is It?  by William Wheaton and Gleb Nechayev

Unemployment and Foreclosures  by John Lounsbury

Demand for Housing Near an All-Time Low  by John Lounsbury