Dean Baker: The Meltdown Lowdown

from The American Prospect:



The Meltdown Lowdown

This week in economic news: House prices continue to plummet, speculation is probably not to blame for high gas prices, and new corruption is exposed in the mortgage industry.

Dean Baker | May 29, 2008 | web only



House Prices: Going Down Fast

Remember the good old days when house prices only went up? Well, those days are long gone. The March Case-Shiller indexes, the best measure of house prices, show that prices are falling faster than ever.

Case-Shiller 20-city index shows house prices declined by 14.4 percent from March 2007 to March 2008. The annual rate of price decline over the last quarter (that is, the amount the price would decline if prices dropped for the rest of the year as fast as they have dropped this quarter) was 25.1 percent in this index. Since the peak of the housing bubble in July 2006, the 20-city index shows a drop of 16.4 percent.

Prices are dropping most rapidly in the formerly hot markets. Over the last year, prices in Los Angeles, San Francisco, and Miami are down by 21.7 percent, 20.2 percent, and 24.6 percent, respectively. In the last quarter, prices in these cities have been dropping at 37.6 percent, 37.3 percent, and 34 percent annual rates.

Prices are now falling almost everywhere. Over the last quarter, prices in Washington, D.C., Chicago, and Boston fell at annual rates of 26.3 percent, 22.1 percent, and 13.9 percent, respectively. Over the last 12 months, prices in these cities are down 14.7 percent, 10 percent, and 5.9 percent, respectively.

This rate of price decline virtually guarantees a flood of defaults and foreclosures later in the year. It is difficult to understand what the economists who say that we are through the worst of the mortgage crisis could possibly mean. The banks have not written down the hundreds of billions of dollars of losses that will surely result from this wave of foreclosures. When they do, it will be an enormous hit to their balance sheets.

Wait, Haven't We Seen This Movie Before?

Anyone want a copy of Are You Missing the Real Estate Boom? The Boom Will Not Bust and Why Property Values Will Continue to Rise Through the End of the Decade: And How to Profit from Them? The book was written by David Lereah, formerly the chief economist with the National Association of Realtors. Mr. Lereah was the most widely cited expert on real estate in major media outlets, including The Washington Post, from 2004 to 2006. Amazon.com has used copies available for 39 cents. Of course, given the rate at which house prices are falling in some cities, 39 cents could soon be enough money to buy a house. ......(more)

The complete piece is at: http://www.prospect.org/cs/articles?article=the_meltdown_lowdown_052908