House Prices: Bad, but Abating

Wow, those house prices are looking dreadful, aren't they. Check out the headline on the front page of nytimes.com: "Home Price Index Down 15.8% in May" is the story. And the official press release from Case-Shiller is also very alarming: "Record Low Annual Declines Recorded in May 2008 for the S&P/Case-Shiller Composite Home Price Indices" says the headline, above a chart showing house prices falling off a cliff.

Except, house prices didn't fall 15.8% in May, they fell 0.9% in May, to a level 15.8% lower than they were a year previously. If you look at the actual level of the Case-Shiller, it fell to 168.54 from 170.00 - a decline of 1.46, which is actually the smallest month-on-month decline since August 2007. Back in February, the index fell by 4.75 points in one month, a much larger drop.

The index is based off a level of 100 in January 2000; it reached a high of 206.52 in July 2006. Its current level means that house prices are back to where they were in mid-2004.

Suppose some miracle happened and house prices nationwide rose by 10% in June. The index would go back up to 185.39, compared to a level of 199.44 in June 2007. Yet using today's methodology, the headline on nytimes.com would say that the home price index fell 7% in June.

There's no doubt that the housing market is in bad shape: according to the Case-Shiller index, house prices are now 18.4% below their mid-2006 peak. If you think that housing prices generally are going to fall 20% from the peak, we're nearly there; if you think they're going to fall much more than that, worse is yet to come. But certainly the rate of house-price declines seems to be abating a little.

All of which is why the focus on the year-on-year figures is silly. Look at the month-on-month figures to see what's going on now, and look at the percentage-off-highs for the big picture. The 12-month decline is of interest only to people who bought a year ago and are selling now, which is a tiny fraction of the population indeed.