This morning the S&P Case-Schiller Index to the end of December 2007 confirmed that housing prices across the US fell again in unison across the country and all throughout 2007.
At this rate of decline, Robert Schiller and company will have to design a new percentage change scale axis by the time we get February's data in April 2008. By then the index will have plunged right off the present chart scale which ends at -12%. Before 2007, a year over year decline of -12% would have seemed entirely impossible to most people alive today.
As at the end of December 2007, average home prices had fallen just under 10% from a year earlier at -9.8% for the 10 city composite and -9.1% for the broader 20 city composite. Particularly significant, I think, is that in the past economic recession of 1990-1991, the housing market had bottomed with a -2.8% decline. Up until 2007, -2.8% was the worst year over year decline in US housing that this index had ever recorded.
Meanwhile existing homes for sale inventory has continued to mount, with 10.3 months homes at the end of January up from 9.7 months of supply in December.
Presently home prices are back where they were in mid-2006. So two years of gains have now been completely wiped clean. But according to recent numbers from the National Association of Home Realtors, prices would still have to fall a further 10% nationwide to bring them back to 2004 levels and a another 28% to get back to 2001 levels. Declines of this magnitude have been thought possible by some, including Schiller himself, for some time now.
These type of losses are one way in which this previous bubble market could clear its overhang and come back into equilibrium. In reverting way below mean, markets are able to restore more reasonable and sustainable long-term growth rates.
This is why prudent investors must take every precaution to avoid or limit exposure to asset bubbles. The freefall back through the mean can be devastating.
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