Housing Prices Have Fallen 33 Percent from Their Peak, Erasing $7 Trillion in Household Wealth

House Prices Hit Post-bubble Low

January 31, 2012

Washington Post - Since the depths of the recession, key aspects of the economy have rebounded. The nation’s output has grown. The stock market began an ascent. The unemployment rate drifted down.

But housing?

When it comes to the value of what many Americans consider their biggest financial asset, no such return appears in sight.

Data released Tuesday showed that seasonally adjusted housing prices have reached a post-bubble low, as the minor surge that began in 2009 fizzled, to be followed by the almost continuous slide of the past 18 months.

The housing bust, in other words, appears to be even worse than it was at the nadir of the recession.

For millions of homeowners, that’s an unsettling reality, and potentially an issue in the presidential campaign. But the damage may be far more widespread.

By making people feel less wealthy, according to economists, the decline in home values inhibits consumer spending and hampers the nation’s stop-and-start economic recovery.

“The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand,” said David M. Blitzer of S&P Indices. “I spent the weekend scratching my head and saying, ‘Isn’t there some good number in here?’ ”

The Standard & Poor’s Case-Shiller seasonally adjusted housing index for 20 cities dropped again in ­November, the last month for which data were available, falling to a level not seen since 2003.

In the Washington region, seasonally adjusted prices have been relatively flat since April 2010, according to the index, but they remain about 27 percent below their peak.

Of the 20 cities in the index, only three — Denver, Minneapolis and Phoenix — showed improvement from the month before.

“Looking forward, continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery,” according to a Federal Reserve white paper issued in January.

The dip in home prices stems from an excess of supply, which has been made worse by foreclosures and tighter mortgage-lending standards, according to analysts at the Fed and elsewhere.

The depth and extended duration of the housing slide — it has been six years since national housing prices peaked — are astounding, even to many economists who have watched it closely.

“Housing starts have been at 60-year lows for 38 months — it’s incredible,” said Karl E. Case, emeritus professor of economics at Wellesley College and co-founder of the housing price index. “It’s a complete depression.”

Case noted, for example, the slump’s profound effect on the residential construction industry: Annual housing starts in the United States peaked at 2.37 million and have fallen to fewer than 700,000.

“Eighty percent of a major industry in the United States just disappeared,” he said.

More generally, economists differ on exactly how much the fall in housing prices has retarded the U.S. economy.

But in a paper last year, Case and colleagues John M. Quigley and Robert J. Shiller found that housing wealth has a “rather large effect” on how much households consume.

It is this lack of demand in the economy that has been one of the persistent problems in the U.S. recovery, according to economists. Consumer spending accounts for more than two-thirds of the U.S. economy.

The recent white paper from the Fed noted, for example, that housing prices have fallen an average of about 33 percent from their peak, erasing $7 trillion in household wealth. With that, according to the paper, comes a “ratcheting down” of what people buy.

Home Prices Drop, Consumers Turn Gloomier

January 31, 2012

Reuters - Home prices fell more steeply than expected in November, and consumers turned less optimistic in January, highlighting the hurdles still facing the bumpy economic recovery.

After accelerating at its fastest pace in 1-1/2 years at the end of 2011, the U.S. economy is expected slow in early 2012.

The S&P/Case-Shiller composite index of single-family home prices in 20 metropolitan areas, released on Tuesday, declined 0.7 percent on a seasonally adjusted basis, a bigger drop than the 0.5 percent economists expected.

The decrease added on to the 0.7 percent decline in October from September.

Separately, an index of consumer attitudes fell to 61.1 in January from 64.8 the month before, as Americans turned gloomy about the job market and income prospects, said the Conference Board, representing private companies.

The data frustrated expectations for an increase after sharp gains in consumer confidence in November and December.

"We are braced for a more bumpy picture over the next few months. A lot of expectations probably ran away or got a little too lofty coming into the end of the year," said Sean Incremona, economist at 4Cast Ltd in New York.

"We are still in a very modest recovery, and we do see consumption slowing this quarter, and data like this supports that picture."

Some improving housing data in late 2011 had raised hopes the recovery was finding its footing. But weaker numbers this month have underscored how lengthy the healing process will be.

"I'm absolutely of the opinion we've bottomed out. The debate now is whether the recovery begins, and I'm not sure that recovery is earnestly underway," said Eric Lascelles, chief economist at RBC Global Asset Management in Toronto.

"The reality is the housing market is so far from normal that it will take years to get back to its normal state. Similarly it will take a while before it really is contributing properly to economic growth."

U.S. housing prices have plunged by about a third from their peak before the financial crisis, and a combination of high unemployment, tight mortgage lending conditions and more foreclosures in the pipeline are holding back a recovery.

Would-be homeowners have also shied away and data from the Commerce Department on Tuesday showed the homeownership rate dipped in the fourth quarter to 66.0 percent from 66.3 percent.

Aside from the second quarter of 2011 when the rate was at 65.9 percent, homeownership is at its lowest level since the second quarter of 1998.

The day's disappointing data took Wall Street lower, undermining earlier optimism over a possible Greek debt deal.

Also weighing on the market was a report that showed business activity in the U.S. Midwest grew more slowly than expected in January - the index fell to 60.2 compared with a forecast of 63 - hurt by a weaker labor market.

A wider reading of the U.S. factory sector is due on Wednesday with the release of the Institute for Supply Management national manufacturing survey.

Last week, the Federal Reserve showed the extent of its concern about the uncertain U.S. economic recovery by signaling it would keep interest rates near zero for nearly three more years. That gloomy assessment was echoed on Tuesday by a Congressional Budget Office report that saw U.S. unemployment above 8 percent this year and in 2013.

Companies are feeling the pinch too. Growth expectations for first-quarter earnings are declining sharply, due to worries about slowing growth and weak revenue trends at major U.S. firms, according to Thomson Reuters data.

A report released on Monday showed spending was flat in December as Americans focused more on saving.

Once a key pillar of the U.S. economy, Americans have taken a more frugal tack as many struggle with hefty debt burdens.

"With the global economy slowing and domestic fiscal policy a drag on growth, the wellbeing of the U.S. consumer is crucial to the recovery," Alistair Bentley, economist at TD Bank Group, wrote in a note.

"Today's number, coupled with yesterday's disappointing personal spending data, offers a reminder that underlying demand is still too soft to absorb the economy's excess slack."

On a seasonally adjusted basis, 17 of 20 cities racked up monthly home price declines, and average national prices were around levels seen in mid-2003, according to S&P/Case-Shiller.

Prices in the 20 cities also steepened their year-over-year decline, falling 3.7 percent compared to a 3.4 percent decline in October.

Last week, the Obama administration took steps to head off a new foreclosure crisis but critics and even some supporters said it was unlikely to prove much more successful than other government programs to date.

Some Federal Reserve officials have said the central bank should consider buying more mortgage-backed securities to help boost the struggling sector, though some economists question how effective that would be with borrowing costs already so low.

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