Today I was looking into the state of US housing prices to determine if the market has hit a likely bottom or if we can expect to see further declines. I was also curious to see if the US housing data could provide me with any insights into where Canadian housing prices are likely to end up if they follow US trends. Now I realize that Canadian mortgage lending practices are much stricter then our neighbours to the south and we will not likely experience the same magnitude of housing price declines, but it is interesting to look at the general trends and duration of the decline in prices.
In my opinion the future of the US financial markets will be heavily influenced by the trends in the US housing market. After all it is the US housing market that first initiated this dilemma that we find ourselves in today. If US housing prices have stabalized from their free fall over the last 2 years then it is good support for hopes of an economic recovery in the next year or two. The networth of many Americans is tied up in thier homes so if housing prices are continuing to decline then it will cause a continual decline in personal consumption which is a core component to a healthy economy. If people aren’t willing to spend then corporations post lower earnings which leads more job losses, higher unemployment and further a reduction in personal spending. A viscious cycle.
The best US housing price data that I have come across is the Case-Schiller Housing Price Index by Standards and Poor. The index publishes national average US housing prices on a quaterly basis dating back to 1987. This length of back data is ideal for analyzing the long term trends of US housing prices.
As you can see from the graph above US housing prices peaked in 2006 at 190 where they had increased 90% from Q1 2000 when the index was 100. Since mid 2006 US housing prices have been on a sharp decline and are currently down 32% from the peak at the Q1 2009 index level of 129. From Q4 2008 to Q1 2009 US housing prices have decreased 7.5% which signals that prices have not finished declining.
The second graph illustrates the year over year percentage (%) decrease in the housing price index. From this graph it is evident that the % year over year decrease is increasing which doesn’t give much hope for prices stabalizing any time soon. Given this investors should be cautious about their expectations for a continued rally in the stock market and a quick return to economic growth.
What are your thoughts?
