U.S. home prices likely to decline for another year

U.S. home prices likely to decline for
another year by watching the futures market

The Case-Schiller Composite-10 index of home prices in 10 cities fell by 18.0% y/y in April, which was not as bad as the maximum year-on-year decline of 19.4% seen in January 2009. There was some further potentially good news in the latest Case-Schiller report on June 30, which showed that home prices in eight of the 20 cities in the Case-Schiller Composite- 20 index actually showed an increase on a month-on-month basis. The cities showing an increase included Dallas (+1.7% m/m), Denver, Cleveland, Washington DC, San Francisco, Boston, Atlanta and Seattle. Nevertheless, the other 12 cities showed declines in home prices, thus pushing the overall index lower for the 34th consecutive month.

The Case-Schiller Composite-10 Home Index peaked at 226.29 in June 2006 and has so far fallen by a total of 33.6% from that high. The CME futures market for the Case-Schiller index is discounting a continued decline in the index to a low of 133.60 in May 2010, where the index would be down by a total of 41.0% from the peak and by another 11% from the current level. The Case-Schiller index is showing much larger declines than broader housing indexes (such as those compiled by the Federal Housing Finance Agency and National Association of Realtors) because the broader indexes include homes in rural and less populated areas of the country, which saw a smaller housing price bubble than the cities and thus do not have as far to fall as the bubble deflates.

The downward pressure on U.S. home prices is likely to continue over the next year because of the huge inventory of homes that are already on the market and because more homes will be coming onto the market from the rising foreclosure rate. Up to 40% of recent existing home sales have been at distressed prices involving either a foreclosure or a short sale. The Mortgage Bankers Association reported that mortgage delinquencies as a percentage of total loans rose to 9.12% in Q1-2009, which was by far a record high for the series that has history back to 1979. A large proportion of those delinquencies are likely to move into foreclosure as the recession drags on, thus putting additional downward pressure on home prices.