Tuesday, December 29, 2009

Beantown Bust: Boston CSI and RPX October 2009

Subtitle: The Decline Drags On...

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 October, both the CSI and RPX confirmed that the extra-seasonal government sponsored bounce that started in the early spring has played itself out and prices are again in decline with a month-to-month decline of 0.59% to the CSI and a 5.27% decline to the RPX while on a year-over-year basis the CSI declined 2.81% while the RPX increased 2.25% 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 15.21% since the peak set in September 2005 while the Boston RPX shows a 24.22% price decline since its peak of June 2005.

It’s important to note that while the government housing tax gimmick had an unquestionably significant effect on demand and prices for homes on the lower-end, the upper-end homes remained largely in decline even throughout the spring and summer buying binge.

Click on the following ultra-cool zoom-able dynamic chart showing the three seaonally adjusted price tiers S&P provides for Boston as well as the 12 month moving average of the Boston area "sale pair counts" a near-organic single family home sales series also provided by S&P.

Longish-time Bostonians should be used to the strong cyclical nature of our residential real estate market as it has been less than two decades since our last housing meltdown.

The most obvious difference between the 90s housing bust and today is that during the 90s 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 within a backdrop of an (more or less) expanding economy.

Now that the economy, particularly the job market, has firmly taken a turn for the worse (particularly our local Boston area economy), home prices will likely suffer a prolonged contraction.

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 October Boston condo prices declined 3.52% on a year-over-year basis and 12.73% on a peak decline basis (see chart below).

In all likelihood the still low consumer confidence and substantial increases in unemployment will work to place significant downward pressure on property prices, particularly condo prices, for the foreseeable future.

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.

Notice that with today’s release, Boston has now exceeded the number of months of annual declines seen in the 90s bust as well as fallen further on a peak percentage basis.

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

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.