Most Housing Markets Remain Sheltered from the Downturn

Lew Sichelman. National Mortgage News

The housing markets in the vast majority of the country have been largely unaffected by recent price declines, according to a partner in a popular index the media likes to use to show the enormity of the housing crisis, and an index housing trade groups say paints exactly the wrong picture.

"There's no question there's no bubble in 43 states," Karl Case, who distributes the monthly S&P/Case-Shiller Housing Price Index with Robert Shiller, said at the Midwinter Housing Conference here late last month.

Mr. Case's presentation reinforces protests by the National Association of Realtors and the National Association of Home Builders, among others, which argue that there is no national housing market.

Robert Shiller, an economics professor at Yale, is generally the Case-Shiller Index's public persona.

The trade associations have complained bitterly that both the popular press and the trade media focus on the composite figures when the index is published each month instead of looking to see what is going on in each individual market. Even small-town newspapers and television stations point to the overall average rather than digging to determine the numbers for their particular burgs and hamlets, they grumble.

According to the latest index, the composite for the 20 major markets followed closely by Case-Shiller is down 10.5% from the peak in July 2006.

In addition, the average price in the 20 markets is down from each of their peaks.
Nevertheless, Mr. Case, who noted that "housing markets are very emotional," said that prices have remained relatively flat in most places.

The Wellesley College economics professor predicted that prices "are likely to correct further," though he stopped short of forecasting exactly when they will hit bottom.

"Trying to predict that is a fool's game," he told the conference.

"There's no way to tell when the downturn will run out of gas. You can tell when it's beginning, but not exactly when."

But he did point out that the current cycle is looking more and more like the last three downturns, which may mean the end is near.

In each of the three previous cycles - 1973-75, 1978-82 and 1986-91 - gross residential investment dropped more than 30% and housing started tumbled 60% or so. This time around, residential investment is down 29% so far and housing starts are off 56%.

"It's got a little ways to go," he said of the current housing recession. "But we're getting close."
Mr. Case said his index is as precise a model as there is in determining the path house prices are taking. "It's based on every transaction we can get out hands on," he said.

"It really tracts what's happening with inflation."

Based on the index, the economist said the country's housing market falls into "three regimes," each of which will "unwind differently."

One is the group of states, mostly in the Midwest and South, where falling or rising incomes explain everything. Another is comprised on states like Massachusetts and California, where the limited supply of land drives prices.

And the third are the "Johnny Come Lately" states, places like Florida, Arizona and Nevada where greed and gluttony took hold.