August was not a good month for the housing market. According to the Standard & Poor’s/Case-Shiller index that monitors the housing markets in 20 major U.S. cities, seasonally-adjusted home prices dropped for the second month in a row. While prices are still up from August of last year, they are lower than economists predicted. From August 2009 – August 2010 housing prices rose just 1.7%. A panel of 27 economists that were surveyed by Bloomberg had predicted the rate of increase to be higher at 2.1%.
Why the slow down? Numerous factors seem to be contributing. The top reasons seem to be the disappearing of the $8,000 home buyer credit that ended in April along with the steadily increasing amount of foreclosed homes entering the market. Add in high unemployment and low consumer confidence and you have a recipe for a slumping housing market.
If you want to look at comparisons, housing prices in August were about equal to prices in late 2003 and early 2004. Housing prices today compared to housing prices in 2006 are on average 26% lower. Finally, if you are to look at supply vs. demand, there is enough inventory on the market, without adding any more, to last at least 11 months. With these less-than-desirable statistics, the housing market looks bleak – at least for the near future. Even so, the continued slump and low prices are pretty predictable in today’s economy.
“Prices are declining in line with the widening imbalances between housing demand and supply, and we can expect this trend to continue,” said Michelle Meyer, a senior economist at Bank of America Merrill Lynch Global Research in New York, “Home prices are likely to decline, probably on a choppy basis, through at least the middle of next year.” Meyer was one of the economists who predicted the August price drop.
However, the Federal Housing Finance Agency’s (FHFA) report shows seasonally-adjusted home prices have actually increased by 0.4% in August as compared to July. The disparities between the two reports can be explained in part by how they each refer to different sets of data: The FHFA home prices index refers to the mortgages backed by Freddie Mac and Fannie Mae, while the Standard & Poor’s/Case-Shiller index is based on all home prices within the 20 cities.
A continuous rise in foreclosures could put a further damper on the housing market. Even though several larger banks have halted foreclosure proceedings for now, this will most likely only be a short respite. Foreclosures will most likely continue to rise, even if in the slightly distant future.