More Subprime Problems Ahead: Home Prices Hit Record Lows Across the U.S.
Recent housing statistics suggest that tougher times are ahead for investors in subprime mortgage securities and related derivative products. Home prices are falling at dramatic rates and are undercutting both the performance of and the security for these investments. Additional losses seem almost inevitable.
Home prices have declined to record lows all across the U.S. Compared with a year ago in January, single-family home prices in 10 major cities fell 11.4 percent. A broader index of 20 cities shows a similar decline with prices plunging by 10.7 percent.
Data released by the S&P/Case-Shiller composite index, proves that no metropolitan has been spared from the national housing crisis. Markets with the biggest drops were Las Vegas and Miami (tied) and Phoenix where home prices slid by 19.3 percent and 18.2 percent respectively.
Slumping home prices is grim news for the economy. While homeowners watch equity in their homes disappear, which could further dampen consumer spending, banks are shying away from mortgage lending squeezing out potential buyers.
David Blitzer, chairman of the S&P's index committee, sees more problems ahead. "Unfortunately, it does not look like early 2008 is marking any turnaround in the housing market after the declining year recorded throughout 2007. Home prices continue to fall, decelerate and reach record lows across the nation," Blitzer said.
The steep declines are a harsh reality check for sellers who are losing money on home sales, says Joel Naroff, head of Naroff Economic Advisors. Home sellers and investors have to “be realistic and realize prices are going down," Naroff advised.
On March 26, the Conference Board said its index of U.S. consumer confidence hit a five-year low this month. That index is often seen as a gauge of consumer spending.
Brian Bethune, Global Insight's chief U.S. economist, added that it will take time to see whether there are any benefits from the Fed’s effort to prop up the market with their economic stimulus package. "Prices are continuing to decline, and that means declining net equity, which causes households to pull back on spending," Bethune says.
This is the first time since home price data was first collected in 1987 that both housing indexes have shown double-digit percentage decreases. All 20 cities tracked by the index have seen price drops for five months consecutively. Thirteen of the 20 cities reported their single largest monthly decline in January.
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