Tech & Biz

Lowest of the low: housing prices drop

by jessica.lam | June 24, 2008 at 09:34 am

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Continuous speculations has been made over the state of the US economy and housing prices has been cited many a time as an indicator. Good, bad, ugly - the situation is what it is. How are you adjusting to it or are you?

Prices in 20 cities fall for 21st month in a row. One sign of hope: Pace of decline eased in many areas.
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U.S. home prices posted record declines in April, extending a painful losing streak for U.S. home prices.

The S&P/Case-Shiller 20-city Home Price Index fell to a record low of 15.3% on a year-over-year basis, and was down 1.4% from March. The 10-city index was down 16.3% year-over-year and 1.6% for the month.

The 20-city index is based on data going back 19 years, while the 10-city index is 21 years old.

Although every city surveyed posted year-over-year price drops, the month-to-month pace of declines did slow in many cities. And eight metro areas actually posted gains from March to April.

How low must housing prices go before families can afford to buy?

Here is a blogger's response to the decrease in prices. What exactly does it mean when it comes to affording houses?

In a previous post, When Should I Buy a Home? Have We Reached Bottom Yet?, I demonstrated three measures one can use to determine a bubble-has-popped-fizzled-and-deflated home price. Today, I'm introducing a fourth.

When it comes to housing prices, what matters most is affordability. Therefore, we can compare how much money a family makes with the price of a home.

I'm not alone in using affordability as a measure of home value. Dr. Irwin Kellner, MarketWatch, December 2007:

Today, median home prices are 3.5 times the size of median annual family incomes. This may be down from the recent peak of 4.2 times incomes reached last year, but it's way above the 2.8 times that home prices averaged during 1984-2000, when lots of homes were bought, sold and built.

And if you think 2.8 is low, check out the early 1970s. That was when home prices were only 2.3 times median family incomes, and housing was selling like gangbusters.

I'm assuming Dr. Kellner is referring to national median figures. A return from 4.2 times median income to 2.8 will require an average 33% drop in home price / income ratios.

Plummeting prices could derail some of the foreclosure prevention efforts underway across the nation. As home prices fall, that wipes out home equity, often leaving homeowners underwater, with mortgages worth more than what their homes are worth.