In September 2011, US house prices, as measured by the Case Shiller Composite 20 Index, fell by a discouraging and fairly substantial 0.6%m/m (seasonally adjusted). The market was expecting a decline of only 0.1%m/m. This is the fifth consecutive monthly decrease in US house prices (see chart). Furthermore, prices have fallen in 15 of the last 16 months.
Over the past year, house prices are down 3.9%y/y, but have fallen by a cumulative 31.3% since their peak in 2006. In Las Vegas, prices have fallen by more than 60% from their peak.
Overall, despite the fact that the US economy has recorded nine consecutive quarters of positive growth in GDP, the US housing market remains extremely depressed and is the weakest component of the US economy. There is still a very significant over-supply of homes. Many of these vacant homes are now in the hands of the banks following foreclosure; and many more homes are ‘under-water’ and at risk of foreclosure.
Housing activity levels are still near record lows. This includes building permits (which improved a little last month), housing starts and new and existing homes sales. Mortgage applications for the purchase of a home remain exceptionally weak, and home ownership levels are down to levels last recorded in the beginning of 1998.
All of this weakness is despite the fact that the home affordability index is back to near its highest level ever recorded (which was in January 2011). The higher the affordability index, the more affordable housing has become. The index is calculated using three variables, namely: house prices, the cost of borrowing and household income.
Hopefully the US housing market is close to the bottom, both in terms of price as well as activity levels. The stabilisation and recovery of the housing market (even if only a modest recovery) is seen as crucial for a sustained economic recovery in the US.
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