Plummeting house prices

Housing markets are not merely stumbling. Data released on Tuesday showed that within the 20 US cities measured by Standard & Poor’s Case-Shiller indices, the pace of decline is accelerating in the third year of the housing market’s slump. From the September 2006 peak, prices are down 31 per cent on average. Before Lehman Brothers collapsed in September, prices were falling by just over 1 per cent each month. In March, the rate hit 2.2 per cent.

Based on the experience of housing market reversals elsewhere, the US has further to go. Analysing 15 developed countries that have experienced housing slumps between 1973 and 2007, Goldman Sachs found that they lasted six years on average. The typical real fall in prices was 31 per cent. Japan’s slump since 1991 is the longest, while the Netherlands and Finland saw the deepest, with prices halving.

The US ultimately may not be the worst hit. Ireland’s market is off nearly a fifth from its 2007 peak, while the UK, which only topped out last year, has already lost 15 per cent. The experience is far from uniform across America. Dallas, Texas and Charlotte, North Carolina, are down only a tenth thanks to moderate inflation during the boom. Detroit, on the other hand, did not share in the good times but is now suffering with its car making industry: prices are back to 1995 levels. Meanwhile, Minneapolis has just taken the record for the fastest annual decline, with prices down 23 per cent in March.

Yet the US housing market remains the most important. On a day when consumer confidence showed improvement to levels typical in the depths of previous recessions, consider the $380bn of wealth lost in March due to the fall in house values. Were that rate to continue for the rest of the year, notes Real Time Economics, the total loss in 2009 would be about equal to the economic output of China. Plummeting house prices do not suggest a rapid recovery.

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