By Roland Li
The numbers are bleak.
U.S. home prices fell 4.2% in the first quarter of 2011, according to data from Standard & Poor’s Case-Shiller housing index, released on Tuesday. With the latest decline, prices have hit a new post-recession low, and are now comparable to mid-2002 prices.
The trend has been described as a “double dip,” defined by prices dropping below the previous post-recession low in 2009.
“The numbers are horrifying. But it’s focused damage,” said David Blitzer, managing director of Standard & Poor’s and index committee chair of S&P Indices, referring specifically to foreclosures. He noted that certain areas of the country have borne the brunt of foreclosures, rather than uniform distribution. However, the overall result is a drag on home prices.
Nineteen of the 20 major metropolitan areas covered by Case-Shiller were down in prices, with only Washington D.C. seeing gains in prices compared to the previous year and quarter. New York saw a 3.4% decrease in prices compared to the first quarter of 2010, and a 0.9% decrease compared to February 2011.
One reason cited for the decline was a federal tax credit for first time homebuyers, which led to a surge in activity during the early months of 2010, and likely an uptick in prices that resulted from increased competition. But after it expired last year, activity has dropped.
“Last year the First Time Homebuyer Tax Credit pulled a significant number of sales forward and, to an extent, artificially supported prices. So, absent the tax credit, it is understandable that we see prices continue to decline when compared with last year,” said Mark Fleming, chief economist with CoreLogic, a research firm, in a statement. “As we move further away from that support, we will see a leveling of prices and eventually organic improvements in the market.”
CoreLogic’s most recent Home Price Index indicated that prices have declined for eight straight months and were down 7.5% in March 2011, including distressed sales, compared to the previous year. Even without distressed sales, prices were down 0.96%, compared to the previous March.
The hardest hit states in the CoreLogic report included Idaho, Arizona, Michigan, Florida and Illinois, which all saw double digit drops in home values, including distressed sales. New York State performed above the national average, seeing a 1% gain in single family home prices, including distressed properties.
However, S&P’s Blitzer, downplayed the overall impact of the tax credit, citing issues such as financing and employment as factors.
“What I think the tax credit did was just changes the time pattern of sales, rather than actually creating sales. These kinds of programs tend to take from the future,” he said. “I don’t it created too many new buyers. I think it accelerated buyers.”
Case-Shiller and the “double dip” theory has its critics. Jonathan Miller, president and CEO of appraisal firm of Miller Samuel, said that the federal tax credit simply delayed the inevitable, and the long-term slide in housing prices has been one big dip, so to speak, with the tax credit offering only temporary relief.
He also noted that Case Shiller takes closings data from approximately three months before the report, meaning that the numbers lag compared to current conditions. Nonetheless, Miller predicts further declines, followed by flat prices.
Other reports are also grim. According to the Federal Housing Finance Agency (FHFA), U.S. home prices were down 2.5% in the first quarter of 2011, compared to the previous quarter, the largest drop since the fourth quarter of 2008. The study uses data from the purchase prices of Fannie Mae and Freddie Mac mortgages. Prices are down 5.5% compared to the first quarter of 2010.
FHFA’s monthly index reports that prices are down 0.3% for the month of March, a slower rate of decline, but still 19.8% below the peak of April 2007.
“House prices in the first quarter declined in most parts of the country,” said Edward DeMarco, FHFA acting director, in a statement. “In many local real estate markets, particularly those hit hard by this cycle, foreclosures and other distressed properties are still a key factor in recorded and anticipated future sales and may be delaying price stability or recovery. Fortunately, serious delinquency rates also are declining.”
Regional factors have been crucial in shaping the recovery – and lack thereof – of particular areas. The partial collapse of the automobile industry, for example, led to countless layoffs, and Detroit has seen housing prices fall 30% from 2000 values, according to Case-Shiller data. It managed to avoid a new lot with a 1% gain in home prices in February, but it is far from a recovery.
The situation in the southwest, particularly Phoenix and Las Vegas, has more to do with geography. An overabundance of cheap land and rampant speculation has led to acres of unbuilt or unsold homes, which remain frozen in the wake of the recession. Decreases in tourism have also hit the area, along with the likes of Florida, leading to more layoffs and, subsequently, less capital to invest.
In contrast to the struggles of much of the country, a lack of supply and constrained land leads to the skyscraper-high prices of Manhattan, while a surging financial sector fills homes on the strength of rising compensation. In Washington, D.C., perhaps the country’s strongest housing market, a federal government backbone employs a vast workforce, and the residential market has remained steady.
But the long unwinding of foreclosures – delayed because of scandals involving “robo-signing” and other discrepancies – is expected to remain a drag on the entire housing market.
“We continue to have the overhang of foreclosures,” said Robert O’Brien, vice chairman and head of Deloitte’s U.S. real estate practice. “That also creates a lot of uncertainty.”
He said that some studies predict that current foreclosures will not be resolved until late 2013.
The global economy has an indirect effect on the domestic housing market, and recent events have not helped. Fears of European defaults, natural and nuclear disasters in Japan and turmoil in the Middle East have hurt worldwide trade and economic stability.
But experts say the most crucial factors for long-term recovery are a recovery in the job market, more accessible financing, and the unwinding of foreclosures. For now, such progress remains elusive.