Falling Home Prices Set Record
U.S. home prices in the second quarter of 2007 fell 3.2% compared to the same period in 2006, Standard & Poor’s reported earlier today. The price drop marked the largest year-over-year decline ever recorded in the 20-year history of the Case-Shiller home price index. The Case-Shiller index, which tracks multiple sales of the same homes, is considered by many observers to be the best gauge of national and metro real estate values. “The pullback in the U.S. residential real- estate market is showing no signs of slowing down,” said Robert Shiller, chief economist at MacroMarkets LLC, which computes the price index for Standard & Poor’s.
Other economists were pessimistic on the sector as well. In MarketWatch today, Charles Dumas, an economist for Lombard Street Research in London, said, “This slow-burn downswing probably has a long way to go… The backlog of unsold homes has reached a level at which buyers are likely to get nasty, insisting on deep price cuts. As repossessed homes come on the market over the next 18 months, downward pressure on home prices and whole neighbourhoods will intensify.” Joshua Shapiro, chief economist for New York-based MFR Inc., added, “We are fast approaching the rate of price decline seen at the end of the 1990-91 recession, and the odds strongly favor blowing past this mark in coming months.” Alan Ruskin, chief international strategist at RBS Greenwich Capital in Connecticut, told Reuters today, “Plainly, there will be worse to come when the heady cocktail of a large inventory overhang is mixed with tighter lending standards.” Economists at Goldman Sachs, who originally predicted the Case-Shiller index would be down 5% on the year by the fourth quarter, said Tuesday’s report creates “downside” risks to their forecast. Andrew Tilton, a Goldman Sachs economist in New York, told Reuters, “It does look like there’s a bit of acceleration in the pace of decline and this comes before the credit crunch.”
While some hope that home values will bounce back quickly once the bottom is reached, the historical data suggests otherwise. MarketWatch noted that the last time prices fell so much, it took more than eight years for home prices to return to their peak level.
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