Across the Curve

A Different Version of Case Shiller

The Case Shiller Home Price Index fell -15.8 percent in May from the preceding year. The rate of decline month over month has slowed and there were actually pockets of strength in which prices rose.Deutsche Bank equity analysts have flashed a yellow warning light for this line of reasoning. This data is not seasonally adjusted and the period January through June should perform better than the latter half of the year. The analyst notes that the OFHEO series subtracts 1.0  percent in June. I will end with an excerpt from a piece which UBS economists distributed to that firm’s clients. It is even more gloomy than the DB analysis.

The more rapid declines in the composite 20 index late last year and at the beginning of this year likely reflected the collapse in home sales and mortgage credit availability. In that regard, we believe the more moderate pace of decline in April and May may reflect some lessening of the downward pressure from plunging sales and market turmoil. However, we think some of the moderation may also be seasonal: In past years, price increases were consistently larger in April and May than earlier in the year (see table below). The plunge in prices at the start of the year may be a bit exaggerated, but the slightly smaller declines so far in Q2 also may overstate any change in momentum.

We expect prices to continue declining for a while, albeit not quite at the pace of the first quarter. Although the rate of decline has moderated, downward pressures on prices remain significant. Inventories of vacant homes for sale remain exceptionally high relative to sales, and foreclosures continue at a rapid pace. Also, the housing affordability index has fallen, on balance, since February as mortgage rates have risen, and we expect a further decline to be reported for June (due Wednesday). We forecast a cumulative drop in national average home prices of 25% peak to trough. In May, the composite 20 index was down 18.4% from the peak. Futures markets for the composite 10 index show prices down another 14% through May 2009.