Thursday, April 02, 2009

Beantown Bust: Boston CSI and RPX January 2009

The S&P/Case-Shiller (CSI) Home Price index together with the Radar Logic (RPX) for Boston represent the most accurate indicators of the true price movement for both single family homes and the entire residential real estate market as a whole (singles, multi and condos).

For January, both the CSI and RPX showed continued and accelerating weakness with the CSI declining 7.29% on a year-over-year basis while the RPX dropped 23.79% over the same period.

Further, both reports indicate that area home prices have suffered significant peak declines with the Boston CSI showing a decline of 17.39% since the peak set in September 2005 while the Boston RPX shows a 38.08% price decline since its peak of June 2005.

It’s important to note also that with the January release the Boston CSI has now registered a peak decline that is larger (see peak charts below) than the complete peak-trough decline seen during the 90s “savings and loan” housing bust.

Unfortunately for “homeowners” and housing speculators though, we are likely only just now reaching the cliff side for Boston area residential real estate prices.

The most obvious difference between the 90s housing bust and today's cycle is that during the 90s bust the home price decline occurred mostly in-line with the larger macroeconomic decline.

Today though, all of the home price decline seen prior to mid-2008 occurred against a backdrop of an (more or less) expanding economy.

Now that the economy has firmly taken a turn for the worse (particularly our local Boston area economy), home prices will suffer to the greatest degree seen in this cycle.

The following two charts compares the Boston CSI to the Massachusetts unemployment rate during the 90s bust and today.

Notice how early we are in the unemployment cycle today… there is lots more pain to go.

Recently S&P introduced a new line of data series that specifically track condominium prices in five select markets including Boston which showed that in January Boston condo prices declined 6.71% on a year-over-year basis and 15.19% on a peak decline basis (see chart below).

In all likelihood the dramatic declines to consumer confidence and increases in unemployment will work to place significant downward pressure on property prices for the foreseeable future.

As you can see from the chart below (click for larger), although the RPX captures a greater degree of seasonality, both series are very strongly correlated.

The January results confirm that the typical seasonal pattern is firmly in place as all indices head lower on a downward trend that generally bottoms in mid-winter.

To better illustrate the drop-off in home prices and the potential length and depth of the current housing decline, I have compared BOTH the normalized price movement, annual and peak percentage changes to the Boston CSI home price index from the 80s-90s housing bust to today’s bust.

The “normalized” chart compares the normalized Boston price index from the peak of the 80s-90s bust to the peak of today’s bust.

Notice that during the 80s-90s bust prices took roughly 46 months (3.8 years) to bottom out.

The “annual” chart compares the percentage change, on a year-over-year basis, to the Boston CSI from the last positive value through the decline to the first positive value at the end of the decline.

In this way, this chart captures only the months that showed monthly “annual declines”.

The “peak” chart compares the percentage change, comparing monthly Boston index values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

In this way, this chart captures ALL months of the downturn from the peak to trough to peak again.

As you can see the last downturn lasted 105 months (almost 9 years) peak to peak including 34 months of annual price declines during the heart of the downturn.

The final chart shows that the Boston housing market has been, in a sense, declining steadily since early 2001 when annual home price appreciation peaked and the intensity of the housing expansion began to wane (click on following chart for larger version).

It appears that that the main thrust of the housing expansion occurred “in-line” with the wider economic expansion that was fueled primarily by the dot-com bubble and that since the dot-com bust, the housing market has never been quite the same.