Since there is a fair amount of seasonality in housing prices, the seasonally adjusted numbers are the ones to look at. On a year-over-year basis, the C-10 is down 2.4% and the C-20 is down 3.1%. From the peak, the C-10 is down 30.3% and the C-20 is off by 29.4%.
The consensus expectation was that the C-20 would show a year-over-year decline of 3.1% in December, so the results were in line with expectations. The year-over-year decline in November was 5.3%.
The first chart (from http://www.calculatedriskblog.com/) shows the history of the year-over-year changes for both composites. The indexes first turned negative on a year-over-year basis at the beginning of 2007. While we are well off the bottom, even in the best-case scenario we are not likely to turn positive for at least a few more months. And as I explain below, I really doubt the best-case scenario will come to pass.
While home prices have shown some stability, particularly in the second half of 2009, much of that has been due to extraordinary amounts of government support. The two most important parts of that support, the “first time buyer tax credit and the Fed’s buying up of $1.25 Trillion worth of mortgage-backed securities (and thus holding down mortgage rates), are scheduled to come to an end in the spring.
It is very much of an open question as to what will happen when those training wheels come off. My bet is that we see a second leg down in housing prices.
There is still a big inventory overhang in the market. That is particularly true if one considers the shadow inventory of houses that are either seriously delinquent on the mortgage or are actually in the foreclosure process. Very few of the mortgage modification (the HAMP program) have been made permanent.
Furthermore, history suggests that as many as half of those will re-default anyway. That is especially true when the modification simply stretches out the repayment period, or slightly reduces the interest rate. If a house is underwater on the mortgage, those steps really don’t solve the problem. The only real cure is a reduction in principal. That could happen via the bank giving it to the existing mortgage holder (very rare) or by the homeowner selling the house for less than the amount of the mortgage (what is known as a "short sale").
Short sales are becoming increasingly common, and are likely to be even more common this year. Those short sales will be simply more supply on the market.
Housing prices are enormously important. For starters, housing is very leveraged, much more so than equity investments are. Thus relatively small changes in prices have a big impact on people’s net worth. Housing wealth is also much more widespread than equity wealth.
For the vast majority of Americans, the equity in their house is (or was) the main source of wealth for people. Yes, a large percentage of people have some money in the stock market, either directly or indirectly (i.e. mutual funds), but for most, the portfolios are relatively small.
The overall amount of wealth in housing is roughly on the same scale as that of equities; however, I don’t think there is anyone who has even $100 million in personal housing wealth. There are many people (most of the Forbes 400 list) who own several billion of equity wealth.
Also, if the value of a house falls below the amount of the mortgage (goes underwater) it makes a lot of economic sense to simply stop paying the mortgage and eventually walk away from the house. Not everyone will do so and it is probably not worth doing if the amount you are underwater is just a few thousand. If it is substantial, however, then it really does not make a lot of sense to continue paying your mortgage.
That means more losses up and down the mortgage complex, ranging from the GSEs like Fannie Mae (NYSE: FNM - News) and Freddie Mac (NYSE: FRE - News) to the mortgage insurers like MGIC (NYSE: MTG - News) to the big banks that issued the mortgages and continue to service them like Bank of America (NYSE: BAC - News).
The second chart (also from http://www.calculatedriskblog.com/) shows the data for each of the 20 cities. It is based on the cumulative decline so far in each city. The blue bar shows how far prices had fallen by the end of 2007, the yellow by the end of 2008, and the red through the end of 2009. Thus if the red bar is shorter than the yellow bar, it means that prices during 2009 rebounded.
There is no clear-cut pattern between the cities that held up well in the beginning and how they performed in 2009. Some cities like San Diego and San Francisco, which were among the hardest hit in 2007, have actually started to recover, while some that held up well in 2007 like Portland and Seattle had big price declines in 2009. Other early losers like Las Vegas and Phoenix, are still basket-cases. Dallas, on the other hand, held up well in 2007, and already began rebounding in 2009.
Overall, this was a modestly positive report, but I fear it is just the eye of the hurricane. When the government support comes off in the spring, we are likely to feel the other side of the storm. Still, a short reprieve is better than no let up at all.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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