Declines in the Case-Shiller Index not uniform

Up until recently, the declines in the S&P/Case-Shiller Index have disproportionately hit the lowest third of the pricing tier (the index subdivides home sales into low, mid, and high-level tiers that are customized for each metro area they study).

In the Los Angeles (Southern California) region, that's meant that the declines in the entry-level category (priced under $309,184) reached 51% between the peak in 2006 and January of 2009. That compares to declines of 39% for the mid-level tier (priced from $309,184 to $470,182) and 29% for the highest tier (priced over $470,182). The decline for all homes during the same time period was 39%.

More recently, however, it looks like home prices in the upper two tiers are beginning to finally capitulate. Over the last six months in Los Angeles, the index shows declines of 11% in the middle and upper tiers versus 17% for the lowest one, and between December of 2008 and January of 2009, the declines for all tiers ranged from 2% to 3%. In other words, the declines are starting to mirror each other through all pricing categories.

To me this makes perfect sense. In the beginning stages of this downturn, it was the sub-prime borrowers who were put in homes they couldn't afford, and, in general, they would have purchased entry-level homes. But as the recession hit, business owners and executives also starting seeing smaller bonuses, which meant that the priciest homes (especially those priced over $1 million) started seeing declines. For months, the one category which was often defying the market more than the other two tiers was the mid-level one.

But without sufficient equity to trade up from entry-level homes and a greater interest among investors for entry-level foreclosures, the reason mid-level homes were holding firmer was because their owners have more resources. But with unemployment now hitting 8.5% nationally (the highest since 1983), the mid-level tier is getting hit with larger economic pressures, and I'd expect to see some greater corrections throughout 2009 and into 2010.

S&P/Case-Shiller Index
January 2009
Los Angeles	Low Tier	Middle Tier	High Tier	All Sales
12-month	37%	24%	18%	26%
Peak	51%	39%	29%	39%
Nov-Jan.	7%	5%	4%	5%
Dec-Jan	3%	2%	2%	3%
July-Jan	17%	11%	11%	14%
San Diego
12-month	29%	20%	21%	25%
Peak	50%	39%	32%	41%
Nov-Jan.	5%	3%	5%	5%
Dec-Jan	3%	1%	3%	3%
July-Jan	14%	10%	15%	14%
San Francisco
12-month	39%	25%	18%	32%
Peak	58%	39%	25%	43%
Nov-Jan.	8%	5%	7%	8%
Dec-Jan	5%	3%	4%	4%
July-Jan	20%	13%	15%	21%

In San Diego -- which is often seen as a bellwether for California because it entered the housing recession earlier than other parts of the state -- the correction is already being felt in the high tier, so I'd expect to see prices in the middle tier start to capitulate more this year.

In San Francisco, although its housing downturn was later than San Diego's, it seems to be making up for lost time, with declines over the last two months ranging from 3% to 5% among the three tiers.

Although two months do not a trend make, it will be very telling to see what continues to happen with this index in the months ahead.