The latest data on house prices shows increased stability in prices at the national level, which may signal the beginning of the end of declining house values. But the question of whether house prices have found a new equilibrium varies widely by location. And it is still necessary for the Obama administration to help ensure that homeowners are able to modify unsustainable loans to prevent foreclosures and avoid putting additional downward pressure on prices.
House prices are down by about 30 percent from their peak in early 2006 at the national level. Yet there is significant variation in price movements at the metropolitan level. Only 9 of the 20 metro areas tracked by Case Shiller showed year-over-year price gains in November, but all 20 metro areas showed improved price changes between November 2008 to November 2009 as compared to from October 2008 to October 2009.
The picture is decidedly mixed for the places most closely identified with the housing bubble. With the exception of Detroit—which is now 42.9 percent below its peak—the only places with more severe housing declines than the national average are in Arizona, California, Florida, and Nevada. Hard-hit California metros, represented in the Case Shiller index by Los Angeles, San Diego, and San Francisco, are off between 37 percent and 38 percent from their peaks, but all three areas showed price increases compared to last November. The other bubble states, by comparison, continued to show year-over-year declines in November, with Las Vegas being the only 1 of the 20 metro areas tracked to register a double-digit drop, down 17 percent.
House prices will likely truly stabilize when they come back in line with historical norms. House prices as of November 2009 are now below their November 1999 levels in 8 of the 20 metropolitan areas after accounting for inflation. But average annual house price appreciation exceeded inflation by 1 percent or more over the last decade in coastal cities such as Boston, New York, Washington, Miami, Seattle, Portland, San Francisco, Los Angeles, and San Diego.
Across-the-board improvement in year-over-year price trends is heartening, but it remains to be seen if the trend is sustainable in all locations. There remains a considerable shadow inventory of foreclosed homes in many areas that are already owned, and these will come on the market over the coming months. Bank-owned properties, as well as homes owned by people facing foreclosure and looking for a quick sale, typically sell at a significant discount to the rest of the market. If these properties further glut the market, prices in the aggregate will continue to decline.
And as we’ve argued elsewhere, it remains imperative for the Obama administration to make improvements to the Home Affordable Modification Program so that all eligible borrowers are given sustainable modifications and can avoid foreclosure.
Andrew Jakabovics is the Associate Director for Housing and Economics. Thanks to Kristen Hamel for research assistance on this column.