S&P: Home Prices Down 15.8% YOY (20-city table), Affordability Returning
The S&P Case Shiller May 2008 report of existing home sales showed record year-over-year 15.8% price declines averaged across 20 major cities (see table below). For the second straight month, all 20 MSAs posted annual declines, nine of which are posting record lows and 10 of which are in double-digits. Since August 2006, there has not been one month where we have seen overall price increases, as measured by the 10-city and 20-city composites.
Earlier this month Karl “Chip” Case, a co-creator of the index, told Barron’s that we may be finding a bottom in housing. Case prefers to look at the ratio of home sale prices to per-capita income in various areas, and specifically the 20 core markets covered in the Case/Shiller Indices. This price-to-household-income ratio is returning to more historically normal levels in many bigger markets. Here’s an excerpt from his Barron’s interview:
Case prefers to study the ratio of sale prices to per-capita income in various locales — already has improved affordability. The change in such ratios varies by market, with Florida, Arizona and Nevada typically tracing short boom-and-bust cycles because any surge in speculative demand quickly is followed by overbuilding, due in part to the abundance of cheap land. The ratio in Phoenix, for example, has been reverting to a more typical six times home prices to income, after soaring to nine times in 2005 and ‘06.
Most volatile are popular metro areas, such as Los Angeles and Boston, where housing demand is high, along with restrictions on development. Los Angeles’ affordability ratio doubled from 2001 to 16 times at the height of the housing boom, before dropping back to around 11. The Boston market never grew so frenzied, perhaps because it was far from the center of the subprime-lending business in Southern California, where an array of bad business practices flourished. Boston’s housing-affordability ratio peaked at 12, and since has returned to a more normal nine times prices to income.
Case Shiller May 2008 Home Prices
The index tracks existing single family homes, and is a highly credible pricing barometer for broad market analysis because it excludes condos and new construction. Condos can have more volatile pricing, and new construction pricing can be artificially set by builders, especially in times of distress when discounts an incentives can skew pricing.
ADDITIONAL TEXT FROM PRESS RELEASE
“The overall real estate market continued to slide in May, with the 10-City and 20 City Composites declining by 1.0% and 0.9% for the month, respectively. Regional patterns stand out: the Sunbelt led by Miami, Tampa, Phoenix, Las Vegas, San Diego and Los Angeles saw the biggest booms and now see the largest declines. The Northeast, including Boston and New York, is cyclical but less volatile while the Midwest, paced by Detroit and Cleveland face difficult local economies” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “One possible bright spot is that seven MSAs, while still negative, showed some improvement in their annual figures over those reported last month. Looking at the monthly statistics, seven of the 20 metro areas were positive for the May/April reading.”
For the month of May, markets that experienced large gains in the recent real estate boom continue to be the biggest decliners. Miami and Las Vegas were the worst performers returning -3.6% and -2.9%, respectively. On a brighter note, Charlotte and Dallas have recorded three consecutive months of positive returns. These two markets are also showing the smallest annual declines, with Charlotte down 0.2% and Dallas down 3.1% versus May of 2007. From a longer-term perspective, since January 2000, the best performing markets are Washington, Los Angeles, New York and Miami. The value of housing in Detroit is lower than it was in January 2000. Over the month, no region reported gains in excess of 1%. But for those that reported monthly declines, three were in excess of 2%.