Home Prices Cool

September 26, 2006

Price gains in the S&P/Case-Shiller Home Price Indexes decelerate sharply, and in some cases, reverse.

The latest data from the S&P/Case-Shiller Home Price Indices reveal a rapid and worrisome deceleration of home price growth.  Despite an uptick in broad-based consumer price inflation, nine out of ten metro areas showed a sharp decrease in annual house price growth rates from the July to the June reading of the indexes. 

"Home prices are definitely showing signs of cooling as year-over-year gains continue to shrink," says Robert J. Shiller, Chief Economist at MacroMarkets LLC.

Five of ten markets posting falling prices over the July/June timeframe; nationwide, the average home price fell 0.1 percent.

On a longer-view annual basis, one market, Boston, showed an outright year-over-year decline, with home prices falling 2.3 percent from last year's levels.  An additional three markets show home price gains that fell short of overall inflation, suggesting that homeowner's lost money on "real" terms: Denver at 2.8 percent, San Diego at 0.7 percent and San Francisco at 2.9 percent.  Only Los Angeles and Miami continue to post robust year-over-year gains, with prices in those two markets up 11.2 percent and 16.5 percent, respectively.

Beyond the pricing data, underlying trends in the market are concerning.  Net home sales fell 11.22 percent from year ago levels in July, according to RealEstateABC.com, while housing permits dropped 20 percent (In the long run, a drop in building permits will be good for home prices; but over the short-term, it reflects concern that prices may fall).  In total, there are nearly 40 percent more homes on the market today than at this time last year. Put that all together and the outlook is somewhat bleak..

"We have heard a lot in recent years about the possibility that there is a house-price "bubble," implying that prices got out of line with the fundamental value of houses and that the current softening could be just the beginning of a steep fall,"  said Janet Yellen,  President of the San Francisco Fed, in a recent speech in Boise, Idaho.  " While I doubt that we'll see anything like a "popping of the bubble"-in part because I'm not convinced there is a bubble, at least on a national level-it is a risk we have to watch out for."

The indexes say that we should watch very closely indeed.


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