Case-Shiller: where will prices go next?

Despite the continuing declines in the Case-Shiller index, some economists still think that prices in certain cities have more decreases in store before hitting bottom. From a BuilderOnline.com article:

As Cleveland goes, so goes the nation?

That's one hopeful way of looking at the Case-Schiller Index, which tracks home prices in 20 major cities. The data for April, which were released this morning, show that Cleveland—whose prices had fallen nearly 14 percent from its peak in August 2006—might be stabilizing. "The fear had always been that prices in markets like Cleveland would go too low, but the data suggest that Cleveland has found a bottom and may be bouncing back," observes Dean Baker, economist and cofounder of the Center for Economic and Policy Research.

Baker presented his latest take on housing market conditions during a teleconference this morning, and on the whole his prognosis is not good. The Case-Schiller Index in April, at 169.85, is down 15.2 percent from the same month in 2007. Adjusted for inflation, the decline is closer to 20 percent, Baker estimates, which means that over the previous 12 months, the housing market lost $4 trillion in value.

While some cities, such as Seattle, Dallas, and Denver, have enjoyed modest price increases, other major metros have seen home prices spiral downward. The composite annualized index during the first quarter for the cities Case-Schiller tracks declined by 22.1 percent, a falloff that Baker observes hasn't been as steep since the Depression era in the 1930s. "Bubble cities," which experienced huge price run-ups earlier this decade, have even seen an acceleration in their price erosions, says Baker: Annualized rates during the first quarter were off 35.6 percent in Phoenix, 33.7 percent in Los Angeles, 35.6 percent in San Francisco, 36.8 percent in Las Vegas, 31.5 percent in Miami, and 29.3 percent in Tampa, Fla...

Baker is considered to be among the more pessimistic of housing economists, but his outlook now sounds practically mainstream: This morning, Global Insight’s housing analyst Patrick Newport told MarketWatch that he also believes the Case-Schiller Index might need to fall another 20 percent to 30 percent, and that prices would need to go down another 10 percent, before the housing market stabilizes. Both Baker and Newport agree that the overabundance of unsold homes on the market is one of the primary reasons why home prices keep declining. Baker, though, points to two other factors: interest rates and unemployment, which have both been creeping up. Baker expects interest rates to hit 7 percent by the end of this year.

He also notes that declines in home prices are being exacerbated by the sheer volume of foreclosures that are dragging down prices in all markets. Baker worries that foreclosures will put more stress on Fannie Mae and Freddie Mac, which are now guaranteeing about 80 percent of the mortgages being issued.