Biggest Home Price Drop Since 1991

Home price declines are accelerating after August's credit crunch put additional pressure on underwater borrowers. According to the S&P/Case Shiller Indices home prices for their 10 city index are off 4.5% year over year which is the largest fall in the index in 16 years. The Case Shiller Indices were pioneered by Karl Case and Yale economist Robert Shiller, who is perhaps best known for his best-selling book Irrational Exuberance, in which he examined asset bubbles throughout history. Shiller's second edition of Irrational Exuberance argued that the U.S. real estate market was a bubble in 2005.

I personally think that Shiller has made a very sound argument that real long term home price appreciation has been quite small (roughly 1%/year over the past 115 years). The graph he produced shows a significant break from trend in home prices in the latter half of the 1990's. It became increasingly difficult to explain the break from trend, and now it appears that home prices are moderating. How far they will fall is anybody's guess. Moody's thinks it will be about 11%, some aggressive economists are predicting a 25% total decline in prices. I bet if you asked Shiller he would be afraid to tell you for fear that you wouldn't take him seriously.


Before I start discussing the recent declines I think it is important to touch on why I rely on the Case Shiller numbers instead of median prices. I prefer the S&P/Case Shiller methodology because it tracks the price path of individual representative homes in a given geographical area by using "matched price pairs." This methodology enables the index to avoid many of the issues with using median based pricing models. For example in the current downturn home price declines were obscured in part by slower sales on the lower end of the spectrum while higher end homes continued selling at a brisk pace. So, although home prices were largely falling the lack of sales on the low end led to a drifting up of the median price, masking home prices declines. Needless to say I am not a big fan of median pricing. This is especially true because median prices are in large part reported by the National Association of Realtors, an industry group I don't see eye to eye with. The other index that is worth looking at is the OFHEO, which is calculated using a similar methodology to Case Shiller.

Here's the S&P Press Release:

New York, September 25, 2007 – Data through July released today by Standard & Poor’s for its S&P/Case-Shiller® Home Price Indices, the leading measure of U.S. home prices, shows a continuation of negative annual returns in the 10-City Composite and the 20-City Composite, as well as 15 of the 20 metro area indices. Both composite indices have registered negative annual growth rates since the beginning of the year. In addition, both indices rate of decline has become larger in each of the seven months from January through July.

Prices in my home town of San Diego are off 7.8% YOY, the third worst of any city of the 20 cities that S&P tracks. The worst home price depreciation occurred in Detroit, which is off 9.7% YOY. The best home price appreciation was in Seattle, which is up 6.9% YOY. The 20 city composite index is down 3.9% YOY.