Tuesday, January 29, 2008

Home Prices Decline at Record Rates

Courtesy of WSJOnline.com
January 29, 2008 12:37 p.m.

A closely watched gauge of U.S. home prices shows they are falling sharply at record rates as a deepening slump in the housing market threatens to damp consumer spending.

Home prices in 10 major metropolitan areas in November were down 8.4% from a year earlier, according to the S&P/Case-Shiller home-price indexes, released Tuesday by credit-rating firm Standard & Poor's. In October, they fell 6.7%, exceeding the previous record year-to-year decline of 6.3% in April 1991, when the economy was emerging from a recession.

November was the 11th consecutive month of negative annual returns and the 24th straight month of decelerating returns.

Robert Shiller, chief economist at MacroMarkets LLC and co-developer of the index, said, "We reached another grim milestone" in November, as 13 of the 20 metro areas in the 20-city index, all of which have data dating to 1991, hit record price drops as well.

The indexes include some places most affected by the fast-growing home-price bubble during the past few years. Miami home prices were down 15% in November from a year earlier, while prices fell 13% in San Diego, Las Vegas and Detroit.

The expanded 20-city index, which dates back to 2001, fell 7.7% from a year earlier and 2.1% from October. Portland and Seattle are the only two metro areas with year-over-year increases - 1.3% and 1.8%, respectively.

The Case-Shiller Index is now one of the most closely watched measures of home prices. But some economists argue that it paints an overly bleak picture.

Columbia University economist Charles Calomiris has noted that the Case-Shiller Index does not cover the entire U.S. market, "and the omitted parts of the U.S. market seem to be doing better than the included parts."

Mr. Calomiris said an alternative measure -- compiled by the federal Office of Federal Housing Enterprise Oversight -- doesn't show as deep a decline and that may be representative of all markets in the U.S. The Ofheo index, however, only tracks houses with mortgages under $417,000, the ceiling on loans that can be purchased or guaranteed by government-sponsored mortgage giants Fannie Mae or Freddie Mac.

Ofheo said at the end of November that, for the first time in nearly 13 years, U.S. home prices fell. A seasonally adjusted index that tracks value of homes purchased and refinanced was 0.4% lower in the third quarter than in the previous quarter, though it was 1.8% above year-ago levels.

Rising home prices plus refinancing options and home-equity loans previously allowed homeowners to squeeze money out of their homes to finance their spending - an important trend because consumer spending fuels about 70% of economic growth. Economists now worry that falling home prices will prompt consumers to pull back on spending enough to slow growth or even tip the economy into recession.

Nevertheless, people who bought their homes several years ago typically are sitting on sizable gains in most of the country. Home sales began to slow in mid-2005. Prices leveled off then started declining in 2006. During the past year, mortgage defaults have soared, leading to rapid growth in foreclosures.

Write to Kathy Shwiff at kathy.shwiff@dowjones.com and Kevin Kingsbury at kevin.kingsbury@dowjones.com

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