During November, home values declined 1.0% in the twenty largest metropolitan cities, according to statistics released today from S&P [.pdf]. All twenty of the largest metropolitan cities suffered a decline in home values, except for San Diego, where home values increased 0.1%. Among these twenty cities, Detroit had the greatest decline in home values with a decline of 2.7%. Five of these twenty cities declined more than 2.0% in November, including Detroit, Atlanta, Chicago, Minneapolis, and Cleveland. Home values in thirteen of these twenty cities declined 1.0% or more. Most importantly, November marks the fourth consecutive month with a decline in home values. These statistics not only indicate a depreciating housing market, but they also increase the likelihood for a double-dip recession within home values.
With the current trend of declining home prices, home prices in 2011 are on pace to reach their lowest level in years. The current level of home prices in the twenty largest cities are only 3.3% above the April 2009 lows. This means a double-dip within home values may be official in three months, when statistics for February are released.
A prime reason why home values are on a negative trend is a result of a growing supply of homes, while there is a declining demand for homes. Even though home value statistics for September, October, and November were already negative, the recent suspension of foreclosure proceedings likely softened the blow for these months. Since fewer homes were foreclosed during this period, it resulted with fewer homes on the market, which lightens the supply of homes.
Now that foreclosure proceedings are no longer suspended, however, the supply of homes will continue to grow and therefore reduce home values even further. This means a new flood of homes on the market may accelerate the descent of home prices. In other words, declining home prices are not only expected to continue their current trend, but the trend could shift from modest declines to staggering declines.
Though, a couple of methods that could prevent further declines in home prices would involve a growth in the demand for homes. First, the unemployment rate would have to drastically improve and increase the number of prospective home buyers. Another possibility to increase the demand for homes would be an institution of a tax credit for home buyers. The government has done this in the past, with the most recent example being the first-time home buyer tax credit. This tax credit gave buyers 10% of the purchased home value or a maximum of $8,000. This credit expired last April, which was also the month with the greatest of amount of home sales throughout 2010. While a new tax credit or improvement in the unemployment rate could not spur enough demand on their own, a modest combination in both of these methods could at least alleviate the growing supply of homes and prevent further declines in home prices.
Continual drops in home values puts stress on the entire US economy. A major implication of lower home values is a decline in property taxes. State and local governments are heavily relied on property taxes. In fact, the latest statistics for state and local taxes [.pdf] show that property taxes account for 32% of state and local income. This percentage of property taxes for state and local income is actually on par with the past. As a result, even though property values are declining, state and local governments are so dependent on property taxes that they have had to increase property taxes.
Lastly, with the growing supply of homes, as well as the declining demand for homes, the future expectations for home values are bleak. While improvements in the unemployment rate and possible tax credits could boost home values, such an outlook is certainly optimistic.