March 26, 2017

Property Values Continue Descent

During February, residential home values declined 1% in the twenty largest metropolitan cities, according to data [.pdf] released today from S&P. This is the seventh consecutive month with a reduction in home prices. All twenty of these cities recorded monthly declines, excluding Detroit, with fourteen of these cities declining 1% or more. The greatest monthly decline occurred in Minneapolis, where home prices sunk 3.1% in February.

Compared to February 2010, home values in the twenty largest metro cities are 3.3% lower in February 2011. For the third consecutive month, ten of these cities hit new lows in February that exceeded the trough levels of April 2009. Overall, current home values in these twenty metro cities are 32.6% below the peak of home prices in July 2006, as the chart below illustrates. Without doubt, these facts reveal how property values are amid a trend of depreciation.

A double-dip in home values appears inevitable.

Notice how this chart shows current home values are about equal with the rock-bottom levels in April 2009. If home values fall below the levels in April 2009, this would qualify as a double-dip recession within home values. Even though a double-dip still hasn’t occurred, a double-dip is very close and quite likely to occur.

More specifically, home prices in April 2009 were 139.26 on the S&P index, whereas current prices are 139.27 – only a hundredth more before the confirmation of a double-dip. The rating unit for the S&P index bases the value of property in 2000 as 100, which means the current rating of 139.27 is 39.27% greater than home prices in 2000. Considering the slight difference between the index rating of April 2009 and February 2011, as well as other lackluster trends within the housing market, a confirmation of a double-dip within home values will occur next month.

The negative trend in home prices is not only rooted in an increased supply of homes on the market, but also a decreased demand for homes. These two factors would contribute to reductions in home values on their own, but the combination of these factors intensifies reductions.

As mentioned in the past, a record 3 million homes were repossessed in 2010 and these repossessed homes are flooding the housing market. Repossessed properties, recently foreclosed properties, and properties whose borrowers were recently 90 days late on mortgage payments are a part of what is known as distressed mortgages or the shadow inventory. The shadow inventory currently accounts for a third of the entire mortgage market, according to a fourth quarter analysis from S&P. Experts estimate it will take at least four years to clear this backlog of homes, which means the supply of homes is expected to broadly expand. The chart below shows the shadow inventory over the past five years.

As this chart shows, a still elevated amount of properties in the shadow inventory indicates the amount of properties will continue to grow throughout 2011, thereby lengthening the time span to clear the backlog of distressed properties and further saturating the supply of homes on the market. While the current rate of foreclosures is below the rate at this point in 2010, foreclosures nonetheless continue and contribute to the oversupply of homes.

In addition to the massive growth in the supply of homes, the demand for homes is simultaneously decreasing. Residential construction and home sales both remained at historically deficient levels in March. The historically high unemployment rate of 8.8%, as well as the aging population of the country, both contribute to fewer prospective buyers and a lower demand for home ownership. As mentioned in the past, these two factors are not only relevant for understanding the current stagnation of the housing market, but also the expectations for housing in coming years.

With the housing market suffering from an oversupply of homes, as well as a decreased demand for home ownership, the negative trend within home values will likely persist in March. What’s more, results for March are expected to bring an unfortunate yet inevitable new low for property values and confirm a double-dip recession within property values.

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