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US Home Prices Drop Sharply in January

A widely watched index of U.S. home prices, Standard & Poor’s/Case-Shiller index, fell 11.4 percent in January, its steepest drop since data was first collected in 1987. The index tracks the prices of single-family homes in 10 major metropolitan areas in the U.S. The broader 20-city composite index also fell, dropping 10.7 percent in January from a year ago. That makes it the first time both indexes dropped by double-digit percentages.

The worst performing markets are Las Vegas and Miami, which both reported 19.3 percent drops. Even the ever-booming California saw double-digit percentage losses: San Diego (16.7), Los Angeles (16.5), and San Francisco (13.2).

Sellers in some parts of the country are cutting prices more aggressively. While sales of existing homes increased in February after falling for six straight months, the median sale price fell.

The vast majority of homes in the U.S. are not in danger of foreclosure, but the housing slump has raised concerns about a recession and has had ripple effects across the economy as consumers spend less in other areas and banks tighten lending requirements. Consumer confidence sank to a five-year low in March as tight credit markets, rising prices and worsening job prospects deepened worries that the economy has fallen into recession. The Fed has aggressively slashed interest rates to spur growth and free up the credit markets.

So what does it all mean?

For homeowners that are not in danger of foreclosure and do not have to sell their homes, this probably means sitting tight and waiting it out. You can’t tap into your growing home equity like you did just a couple of years ago anymore, but as long as your house is worth more than you owe on it, you are doing OK.

For renters considering buying, this could be a great time to start thinking about buying a house. Two caveats:

1. A slowdown means that you won’t have many houses to choose from.

2. You should carefully consider whether the correction to housing prices will continue and prices will go down even more over the next few months.

Dean Baker, economist and co-director of the Center for Economic and Policy Research, said in June of 2007 that “it’s a very good time to be a renter” and wait until prices fall more. We now know that Mr. Baker was right. But it may very well be that more corrections are ahead of us. Mr. Baker added, that the notion that “renting is throwing money” is not necessarily true: you’re throwing away more money paying interest on a house that’s going down in value.

As far as the stock market is concerned, Alyce Lomax of Fool.com says that, “as utterly terrifying as bear markets are to the average investor, the truth is, they happen. They’re inevitable. And many of the smartest investors in the world will tell you that bear markets are the best time to invest in stocks.” I agree with Ms. Lomax: while I don’t plan on buying more stocks right now, I also don’t plan on selling any.

Sources:
New York Times
Yahoo Finance

Photo credit: transguyjay

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