Suitably Flip

Put Away the Matches, Your Home Isn't Worthless Just Yet

The big economic data point of the day is the January index of home prices.  The report, published by Standard & Poor's (pdf), showed U.S. home prices in 10 major metropolitan markets falling 11.4% from January 2007 to January 2008.

(Some media outlets are phrasing the news in a way that suggests prices declined 11.4% during the month of January, which is misleading.  Prices fell 2.3% from December to January and 11.4% over the last twelve months.)

Still, the 11.4% decline represents a record drop over the 21 years such data have been collected and therefore warrants some appropriately solemn recognition.  And indeed, the news cast something of a pall over yesterday's cheerier report that existing home sales accelerated unexpectedly in February.  The continued erosion in home prices isn't spectacular news for home owners who bought into the housing peak in mid-2006, but even following this latest slide, prices are no worse than they were in early 2005, at which point they'd nearly doubled in just five years.

At the risk of belaboring an obvious point, nearly doubling in five years is a big deal.  From 2000-2005, home price appreciation vastly outstripped inflation, stocks, college tuition, and even the price of gasoline.  Even after the net sideways move in home prices from 2005 to 2008, housing still sits head-and-shoulders above the other measures, with the recent exception of gasoline.

The chart below illustrates the relative price change in U.S. home prices, versus the S&P 500, retail inflation (CPI), gasoline's price-at-the-pump, and average tuition and fees at 4-year colleges  (year 2000 = 100).

You're still not convinced.  "Home prices are supposed to rise," you protest.  "We were counting on the kind of appreciation we saw from 2000 to 2006 to continue apace indefinitely, so this ~15% correction is genuinely devastating and ruinous."

And you may have a point, at least concerning those who over-bought at the 2006 peak and banked on uninterrupted, indefinite double-digit appreciation.  But long-term trends in home prices offered no particular justification for that admittedly appealing fantasy.  A buyer looking at $100,000 worth of home in early 2000 might (based on this same S&P data series) have expected that home to be worth $133,000 today, appreciating at a nominal rate of roughly 3.6% per year, as observed between 1987 and 2000.

Imagine his surprise to learn that the same $100,000 home had instead rocketed to $196,000 between 2000 and 2008 (appreciating at the much swifter rate of 8.8% per year), even after the devastating and ruinous collapse in home prices.

Make no mistake - the 11.4% twelve-month decline is steep.  And there may be more weakness on the way.  But U.S. home prices had soared like few other asset classes in recent years and most home owners are still significantly better off than they were at the beginning at the decade.  That may be of little consolation to those who made highly leveraged purchases at the height of the bubble, but for anyone who bought a home at least three years ago, bought more recently but isn't planning to sell immediately (and can afford the mortgage they undertook), or is in the market to buy a home now, the roof is hardly caving in.

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Put Away the Matches, Your Home Isn't Worthless Just Yet

The big economic data point of the day is the January index of home prices.  The report, published by Standard & Poor's (pdf), showed U.S. home prices in 10 major metropolitan markets falling 11.4% from January 2007 to January 2008.

(Some media outlets are phrasing the news in a way that suggests prices declined 11.4% during the month of January, which is misleading.  Prices fell 2.3% from December to January and 11.4% over the last twelve months.)

Still, the 11.4% decline represents a record drop over the 21 years such data have been collected and therefore warrants some appropriately solemn recognition.  And indeed, the news cast something of a pall over yesterday's cheerier report that existing home sales accelerated unexpectedly in February.  The continued erosion in home prices isn't spectacular news for home owners who bought into the housing peak in mid-2006, but even following this latest slide, prices are no worse than they were in early 2005, at which point they'd nearly doubled in just five years.

At the risk of belaboring an obvious point, nearly doubling in five years is a big deal.  From 2000-2005, home price appreciation vastly outstripped inflation, stocks, college tuition, and even the price of gasoline.  Even after the net sideways move in home prices from 2005 to 2008, housing still sits head-and-shoulders above the other measures, with the recent exception of gasoline.

The chart below illustrates the relative price change in U.S. home prices, versus the S&P 500, retail inflation (CPI), gasoline's price-at-the-pump, and average tuition and fees at 4-year colleges  (year 2000 = 100).

You're still not convinced.  "Home prices are supposed to rise," you protest.  "We were counting on the kind of appreciation we saw from 2000 to 2006 to continue apace indefinitely, so this ~15% correction is genuinely devastating and ruinous."

And you may have a point, at least concerning those who over-bought at the 2006 peak and banked on uninterrupted, indefinite double-digit appreciation.  But long-term trends in home prices offered no particular justification for that admittedly appealing fantasy.  A buyer looking at $100,000 worth of home in early 2000 might (based on this same S&P data series) have expected that home to be worth $133,000 today, appreciating at a nominal rate of roughly 3.6% per year, as observed between 1987 and 2000.

Imagine his surprise to learn that the same $100,000 home had instead rocketed to $196,000 between 2000 and 2008 (appreciating at the much swifter rate of 8.8% per year), even after the devastating and ruinous collapse in home prices.

Make no mistake - the 11.4% twelve-month decline is steep.  And there may be more weakness on the way.  But U.S. home prices had soared like few other asset classes in recent years and most home owners are still significantly better off than they were at the beginning at the decade.  That may be of little consolation to those who made highly leveraged purchases at the height of the bubble, but for anyone who bought a home at least three years ago, bought more recently but isn't planning to sell immediately (and can afford the mortgage they undertook), or is in the market to buy a home now, the roof is hardly caving in.