During September, home prices declined 0.7% in the 20 largest metropolitan cities, according to the S&P index [.pdf] released today. The city with the greatest decline during September was Cleveland, where home prices dropped 3.0%. Thirteen other of the 20 largest metropolitan cities also posted falls greater than 1.0%. These statistics clearly indicate a weak housing market. September is the second consecutive month home prices declined.
Additionally, the decline in September was much greater than the decline in August (0.3% in August compared to 0.7% in September). This fall is a reversal of the trend in home prices prior to July, when there were 4 consecutive months [.xls] of increases in home prices. The chart below shows the monthly percent changes in homes prices, as well as the percent change from one year ago.
Following 3 months of increasingly worse declines in home prices, there are legitimate concerns that falling home prices are a new trend of the housing market. The graph above clearly illustrates the onset of what economists refer to as a double-dip recession. Though, when determining whether an economy is facing a recession, the Gross Domestic Product (GDP) is used as the indicator. Two months of declines in GDP indicate a recession. The GDP has increased for 5 consecutive quarters. As a result, it is far too early to declare a double-dip recession. However, there are four other economic indicators that suggest the housing market is not only weak, but actually getting worse.
- Home sales have a hit several record lows in recent months. August is the lowest level of home sales on record, May is the second lowest, and July and September tie for the third lowest.
- The expiration of the first-time home buyer tax credit in April has contributed to a decreased level of home sales – showing that an absence of an incentive for people to buy homes has led to little organic activity. Home sales were higher in April than any other month in 2010.
- Foreclosures continue to flood the market with an increased number of available homes – thereby resulting with a greater supply of homes. There have been over 300,000 foreclosures for 20 consecutive months.
- Unemployment has led to less home buyers, so there is less demand for homes.
These facts show there is an increased supply of homes, yet less demand. As with any market, prices drop when supply outweighs demand, which is exactly what happened to home prices in September, as well as August. Facing such a reality, it is difficult to envision a recovery of the housing market in the near future.