Housing Resists a Turnaround
In the stock market, crashes can happen in hours or even minutes. In the housing market, crashes take months and years. Homeowners with their houses on the market, don’t just get up one morning, smell the coffee and decide to reduce their asking prices by forty percent. It takes time for people to recognize that a bubble has burst, and plenty of sellers never do. They just sit on their homes for years until the market turns around.
As we are in the midst of the slowly unfolding collapse of the greatest housing price bubble in the short history of well recorded housing prices, each month’s data brings little change. Instead, month after month, we got the slow wheeze of a bubble bursting. The January 2009 Case-Shiller house price data, released this morning, by Standard and Poor’s, looked a lot like last month’s data. The decline between November and December for the composite 20 index was 2.6 percent; the decline between December and January was 2.8 percent. Don’t get excited by the fact that last drop was a little higher: those numbers are essentially indistinguishable.
The cities on sand—Phoenix and Las Vegas—continued to have some of the biggest price declines. Phoenix prices dropped by 5.5 percent between December and January; they fell by more than five percent between November and December. Las Vegas’ price declines have been trending at 4.5 percent down per month. If the trend continues, by February, Phoenix prices will have dropped by more than 50 percent since the peak.
I am somewhat surprised that these markets aren’t starting to settle down. The defining characteristic of these two areas, and many other affordable, growing places like Dallas and Houston, is that their ability to supply housing is essentially unlimited. Since builders can produce housing in practically enormous quantities at reasonable prices, and land is essentially infinite, it was always a little absurd for people to pay so much more than construction costs for housing in these areas. But now prices are converging back on construction costs, which is where I had thought that they would land. However, the rate of decline isn’t slowing, and it now looks as if prices might dip below these costs. If that happens, then building will essentially cease. This would be a colossal change, since the Phoenix and Las Vegas areas together permitted more than 30,000 units last year.
After these two places, the most diminished housing markets are in California and Florida. San Francisco, Miami and Tampa all continued to have dismal months. Prices in Los Angeles and San Diego each did slightly better, dropping by about 2.7 percent, but that looks good only by comparison. Prices in these five areas have declined by about 40 percent relative to the peak. These areas had some of the biggest price booms and now they are experiencing some of the biggest price busts. Reversion to the mean is a regular feature of housing markets and they are experiencing that now.
In Charlotte, NC, and Dallas, Texas, buyers seem to have always understood that unlimited supply meant that prices should stay low. These areas sat out the bubble, and they are experiencing much less of the bust. In the latest data, prices in Charlotte, North Carolina, fell by only 1.2, making it the best performing area in the Case-Shiller twenty. Prices in Dallas are down by less than ten percent since the peak.
The two northeastern cities, New York and Boston, continue to look remarkably stable. New York City’s prices fell by 1.2 percent between December and January, which made it the second best performer among the Case-Shiller twenty. New York is the only area where prices today are more than 80 percent higher than they were at the start of the millennium. In both Boston and New York, prices are down by about 16 percent relative to the peak. The optimistic view of their stability is that these cities have shown their ability to rebound century after century, and homebuyers are continuing to bet on their resilience. The pessimistic view is that their crash is coming.
Until October 2008, Chicago had seemed just as resilient as these cities, but its prices have fallen by more than ten percent since then. Between December and January, Chicago’s 4.6 percent price fall was positively Las Vegas-like. Chicago has built more housing than Boston, and it has plenty of Midwestern competitors, like Minneapolis, where prices are also in free fall. Still, somehow I had expected Chicago’s economic strength to keep the bust at bay.
The housing news continues to be bleak for the financial actors who are holding mortgages, the value of which is tied to housing prices. Continuing price declines probably mean that the banks will need even more bailout money.
Yet, these declining prices aren’t all bad. When prices fall, buyers get bargains. One of the glories of America is that people are able to buy high quality houses at affordable prices. We had lost some of that advantage during the unfortunate bubble, now we are getting it back.