House Prices Moderate

Last week I forgot to say that the day before Travel Nightmare Wednesday is September House Price Index Tuesday. Today is the day that S&P releases the S&P Case Shiller Home Price Index numbers for September.Two-story_single-family_home

They’re okay. The 20 city composite was up 0.33% for the month. but only 9 of  the 20 individual cities were up. (Although on a seasonally adjusted basis the composite was up 0.27% with 11 individual cities posting positive numbers.) So basically it was flat. Ho-hum. Boring.

And ain’t that wonderful?

Of course, the fear would be that this is the tide turning again and we’re in for more declines. Anything is possible, but I don’t think so. We will probably get some down months in the near future, but the big bust is over.

Sharp declines in asset prices can take on a life of their own, becoming self-perpetuating. If prices are going down, and everybody knows (or assumes) that they will continue to go down, then nobody wants to buy because they can get a better deal by waiting, and everybody wants to sell right away because waiting costs money. The lack of buyers and rush of sellers, of course, drives prices down more.

Houses can be even worse than other assets in this respect because they are bought with leverage. As prices go down, more houses become underwater, which increases foreclosures, leading to more selling pressure.

Once underway, it’s relatively difficult to break the downward spiral. What kicked it off originally becomes more or less irrelevant. Prices decline because they are declining. House prices began to go down in 2006 because of higher interest rates and, to a lesser extent, because prices had become just so high. Pretty soon, though, that spark that lit the fire was forgotten and the mere fact that house prices were declining was the whole story.

Eventually, the downtrend ends when the market begins to run out of sellers and buyers get tired of waiting. Then prices stabilize, maybe even go up, and the declining prices story stops driving decisions. This is where we are now.

House prices stopped going down in April. (Not at all coincidentally at about the same time as stock prices stopped going down.) That’s long enough ago that people now believe that the bust is over, and since they believe that, it is true.

Of course, not going down is not the same as going up. The economy is still in tough shape and it will be a long time before consumers are actually optimistic about house prices again. Very low mortgage rates are great, but they’ve got to compete with 10% unemployment.

So I see sideways as the new direction for house prices. We are still, it is worth mentioning, down a little for 2009. (–2.7% since December ’08.) Current prices are at the same level they were in January of this year. And in September 2003.

Flat for six years may sound depressing, but consider that even after all the market has been through, since January 2000 (when the 20 city series begins) the house index is still up 46.5%. The S&P 500 is down 25% over the same period.

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