House Prices Expected to Fall into 2011

Case-Shiller House Price Index down 2% in third quarter, reflecting end of home-buyer tax credit and foreclosure slowdown that is expected to depress house prices into 2011

  • The national price index declined 2.0% in the third quarter; 1.5% compared to 2009.
  • Unadjusted 10- and 20-city indices fell 0.5% and 0.7% in September; still 1.6% and 0.6% higher than Q3 2009.
  • Prices were lower in September than in August in 18 cities.
  • We expect house prices to drop another 6 to 8%, and then turn around in 2011.

The Case-Shiller house price indices are three-month moving averages, so September's readings reflect transactions in 20 markets that closed in July, August and September. The national index incorporates sales that closed during the quarter. But this index excludes data from 13 states -- so one might properly refer to it as the "37-state-index." 

Housing demand fell off a cliff after the second tax credit expired. This drop in demand is now showing up in broad-based declines in housing prices. Nationally, prices were up 4.7% in the second quarter and down 2.0% in the third. In June, prices rose in 18 cities. Three months later, prices dropped in 18 cities. 

Going forward, weak demand, foreclosures and a glut of homes for sale should translate into another 5 to 10% drop in the Case-Shiller aggregate indexes.

More than two months have passed since the media first reported that banks had cut corners in processing foreclosures. How serious these irregularities will turn out to be, and how they will affect the economy and the housing market remains unclear. Home sales in the fourth quarter are likely to suffer because of these irregularities, since some distressed properties are being taken off the market. Fewer distressed homes for sale will mitigate the fourth quarter drop in house prices (but at the expense of even lower prices at some later period).