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Home Price Declines Widen Home Equity Woes

In housing and mortgage news this week:

Despite the bad news/good news nature of the above developments, they are not as contradictory as they might seem. They do, however, have markedly different implications for existing home owners and potential buyers.

Drop in home sales gets deeper and wider

S&P/Case Shiller does a survey of median home prices in 20 major metropolitan areas. They release data for each of those 20 areas, as well as a comprehensive composite that acts as a barometer of home prices nationally. This week, S&P/Case Schiller home price index information was released for the period ending April 30, 2008, and the news was not good for home owners.

According to the survey, home prices declined 1.4% in April alone, bringing the year-over-year decline to 15.3%. Month-to-month figures can be unreliably volatile, so the year-over-year reading is generally given more credence. In this case, that 15.3% year-over-year decline is the biggest decline on record, so this is a clear sign of the gravity of the housing slump.

Perhaps just as significant as the magnitude of the nationwide decline is that fact that all 20 metropolitan areas covered by the survey are now negative for the past year. The housing slump has been characterized as being focused on a few regions that had been hot spots for speculation, and to some extent this is true. Year-over-year figures do vary greatly by metropolitan area, with Las Vegas, NV suffering the worst decline at -26.80%, while Charlotte, NC was nearly unscathed at -0.12%. However, this marked the first time that all 20 areas showed year-over-year declines, meaning that the housing slump and its effects are truly a national problem now. 

Home sales: responding to lower prices?

Oddly enough, sales of existing homes actually posted a mild, 2% increase in May. While an increase in existing home sales indicates strength in the market, this does not necessarily contradict the steep drop in prices. First of all, the home sales figure only covers a single month, so it is by no means definitive of the market trend. Second, at some point it is only natural that sales activity should start to be stimulated by lower prices, and finally, in a weak market, it is not surprising that activity would start to pick up a bit before it represents enough demand to stabilize or raise prices.

Implications for home owners and buyers 

The meaning of all this is vastly different for home owners than it is for potential buyers. For home owners, the biggest problem may be for those who have to sell their homes. They face the likelihood of a long selling period, and disappointing prices at the end. Even home owners who are not selling are affected though, as their home equity will be diminished by these widespread price drops.

As for home buyers, the drop in prices represents a more reasonable entry point into home ownership. Still, the tick up in existing home sales activity suggests that it doesn’t pay to hesitate. Anyone in a position to afford a home should start shopping today.

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