Economist's Commentary: March 21, 2008
A Bigger Fall After a Bigger Gain
By Lawrence Yun, Chief Economist
We are well aware of the current weak housing market regions: California, Florida, Arizona, Nevada, and the D.C. region. These areas were also the places where prices increased the most during the boom. So the current price declines in the 5% to 20% range are not as frightening for those who bought a home for the long-term. For example, a typical homeowner who bought in 2000 would be have accumulated $123,000 in Phoenix, $150,100 in Orlando, $242,800 in Riverside-San Bernardino, and $252,000 in Washington, D.C. metro region - based on NAR data. This does not even include the equity addition from paying down mortgage debt from normal amortizing monthly payments. The equity position would be less for those homeowners who took out home equity loans and who took cash-out refinances (I would personally advise against tapping into housing equity unless it is for investment reasons — like paying for tuition or to open a business).
The Federal Reserve data further affirms the long-term housing equity accumulation for homeowners even with recent declines in home prices. Homeowners' net housing equity (home value minus mortgage debt) rose from $6.2 trillion to $9.6 trillion from 2000 to 2007.
In the many parts of the country, there has not been a price decline. NAR data shows that essentially half of the 150 metro markets studied in the U.S. experienced a price increase throughout the past seven years. OFHEO data says close to 70 percent of 287 markets studied had a price increase throughout the past seven years. The Case-Shiller home price index, by contrast, which looks at a very narrow 20 markets, finds most markets experienced price declines in 2007. In rural America, price declines are even more rare.
Because of different price measurements, the gain could be different depending upon measurement. Only the homeowner herself, from the amount received from her house sale, would know for sure how much equity was accumulated or lost.
Interestingly though, if one uses the Case-Shiller price index data — its national aggregate price index — the housing equity gains are much higher than other price data. From 2000 to 2007, a typical U.S. homeowner would have accumulated $103,400 according to Case-Shiller rather than the $75,400 equity gain as is implied by the NAR data.
The Case-Shiller price gain appears outsized and not necessarily what most people would be saying. Perhaps, the methodology of Case-Shiller price index brings volatile swings that distort underlying trends. So the recent price decline in the Case-Shiller price measurement may not be completely a decline in home prices but rather a downward adjustment after the illusory high price gains it showed during the market boom. Sure, home prices have fallen measurably in some Florida and California markets — as reflected in both Case-Shiller and NAR data. But at the national level, the decline in Case-Shiller may be just a downward adjustment to compensate for unrealistically strong price gains it recorded during the housing market boom. After all, 77 percent of U.S. homeowners in a recent survey said their home values did not decline. That is in direct contrast to new reports, often with sensationalized headline words of Collapse and Plunge, based on Case-Shiller price reports.
This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >
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