Standard & Poor’s today released its S&P/Case-Shiller U.S. National Home Price Index for August 2007, and the credit crunch that recently roiled the mortgage market weighed heavily on home prices. Of the 20 markets tracked by the index, only five remain in positive territory over the past year.

However, the rate of appreciation in those markets has slowed, and even Seattle, the strongest market, showed a small monthly price decline. In fact, only two markets — Charlotte and Denver — showed a price increase for the most recent month.

Seattle is still up 5.7 percent for the past year; Charlotte is close behind at 5.6 percent; and Portland is up just 2.8 percent. Atlanta and Dallas are basically flat with 0.8 percent and 0.5 percent increases, respectively.

The worst-performing market had previously been Detroit with a 9.3 percent decline, but that dubious honor now goes to Tampa, which is showing a 10.1 percent decline over the past year. Previously hot markets including Los Angeles, Washington, D.C., Las Vegas, Miami, Phoenix and San Diego are all down more than 5 percent. The Composite Index of 20 markets was down 4.4 percent overall.

So where are we headed in the future? Investor expectations are reflected in housing-price futures and options traded on the Chicago Mercantile Exchange, which are based on a subset of the S&P/Case-Shiller U.S. National Home Price Indices. Expectations of future price changes are implied by the percentage difference in the index value for the relevant market (most recently published on Oct. 30, 2007, for August 2007 period) and the current price of traded futures contracts expiring on future dates.

Right now, investors are betting on a decline in the composite index of 7.6 percent by July 2008 (the futures contract expiring in September 2008 settles based on that period). They expect the index to still be down by 9.4 percent even in 2011. The most dramatic declines are expected in Miami with a decline of over 26 percent by 2011 and in San Francisco with a decline of over 25 percent by 2011.

As always, remember that these contracts are new and thinly traded relative to well-established foreign exchange or commodities contracts, and that means they are reflective of the collective wisdom of fewer investors.

For example, investors are currently expecting a decline in the Denver market of over 7 percent by late 2008, but that market has logged three month of successive price gains. Unlike coastal markets, Denver did not experience outsized appreciation and so the downturn has been very moderate. In this case, investor pessimism may be misplaced and result in losses on those contracts.

 This article was also published by Inman News.

Yesterday Beazer Homes (NYSE: BZH) published results for the quarter ended September 30th.  The stock temporarily rallied based on Wall Street’s relief that the results of an accounting re-statement weren’t worse. 

Momentarily ignored was the company’s ghastly performance resulting from the recent credit crunch.  The cancellation rate reached 68% either because buyers got cold feet or their financing fell through.  That means the company is largely building ‘on spec’ in the teeth of a fierce housing downturn.

Beazer’s stock price was in the mid-40s at the beginning of the year and is trading at a bit over 9 today.  It’s hard to imagine a stock that better qualifies for the old Wall Street warning about trying to catch a falling knife.  Just because this one traded above $40 bucks a few months ago, there’s no reason it can’t go down $3, $2 or zero.

 In a multi-year housing downturn, there will be builders that survive and there will be those that don’t.

The long boom in the real estate market attracted many people into the industry, with the National Association of Realtors’ ranks growing to more than 1 million members. Because the upcycle lasted for 10-15 years in many markets, hundreds of thousands of agents have not experienced a significant down market.

By looking at down markets in the late ’80s and early ’90s, we can make some observations on past real estate declines.

Price declines are relatively shallow. During most downturns, prices tend to decline in the range of 3-6 percent annually with cumulative declines of less than 20 percent. Los Angeles was the exception in recent history, experiencing a cumulative decline of more than 27 percent. Compare this with the NASDAQ index, which was over 5,000 at the height of the dot-com boom in 2000 and is still at only 2,791 seven years later. Of course, because houses are a highly leveraged purchase, a percentage decline even in the teens can eliminate your equity entirely if you bought too close to the market peak.

Down markets can be lengthy. Market observers frequently say that the market will turn up “next year.” This is often wishful thinking. Past downturns have persisted for a number of years, not just one or two. Real estate markets are often characterized as “sticky downwards.” That is, when home sellers don’t get the price they want, they opt to take their properties off the market and wait. While this behavior may cushion the downturn in prices short term, it tends to extend the duration of a market correction.

The big picture matters. Most downturns are a manifestation of larger economic conditions. Generally a national or local recession with substantial job losses drives real estate corrections. The current downturn in Detroit has been the most severe of any major market because of auto industry-related job losses. Many real estate markets declined during the national recession of the first Bush presidency in the early ’90s. In the case of the Los Angeles market decline, the downturn was extended and deepened by an earthquake and race riots.

Source: S&P Case Shiller National Price Index

So what does this mean for real estate professionals in the current downturn? Be prepared for the weak market to last a fairly long time.

In our view, prices are likely to continue to decline by low- to mid-single-digit percentages annually for the several years in the high-cost markets that had the greatest run-up. The wildcard is a recession. If that happens, we will take another downward lurch before we gradually settle to a bottom and begin the upcycle again.

This article was also published in Inman News.

Over the past year, I’ve heard two questions asked on a near-constant basis: How long will this housing downturn last and how low will my market go? The simple answer is: when the inventory stops piling up.

To figure out when that will happen, housing economists study reams of data on building permits, housing starts, mortgage rates, loan resets, affordability indexes, job growth and a host of other factors including consumer psychology. Before you hear the answer from someone’s crystal ball, it’s worth establishing some historical context for your local market.

The most obvious questions are:

How long ago did the market hit its peak? Markets like Seattle, Charlotte and Atlanta are still rising. On the other hand, Boston peaked in September 2005, San Diego in November 2005 and Detroit in December 2005.

How far has the market fallen since hitting its peak? Detroit has fallen the furthest with a 12.4 percent decline as of July 2007, the most recent month for which the S&P Case Shiller indices have been published. San Diego and Tampa have both declined more than 8 percent so far. On the other hand, Chicago and Denver have fallen by less than 2 percent from their peaks.

How big was the run up in prices prior to the market peak? The big California markets all experienced increases of more than 200 percent in the 10-year period prior to hitting their peaks. Miami also soared more than 200 percent. In fact, 10 of the 20 markets in the table below all saw increases of at least 150 percent. The Midwestern markets saw much more restrained price appreciation with a low of 41 percent in Cleveland and a high of 117 percent in Minneapolis.

Looked at in this way, the contrasts are stark. Both the Los Angeles and Cleveland markets peaked in mid-2006 and both have fallen less than 5 percent, but Los Angeles appreciated 267 percent in the prior 10 years while Cleveland was up just 41 percent. You can reach your own conclusion about the desirability of living in Cleveland versus Los Angeles, but the downside price risk in your house would probably be a lot lower in Cleveland at this point.

While local market price direction is largely driven by local supply-and-demand factors, it’s worth considering your market’s recent past before you try to peer into its future.

This article was also published in Inman News.