US housing data shows worst decline in 21 years

Mumbai: In the US housing market, the bad news just gets worse. The Standard & Poor's (S&P) Case-Shiller national index of home prices for the third quarter of the current year, released on 27 November, shows a drop of 4.5 per cent from the third quarter of 2006, and a decline of 1.7 per cent from the second quarter of this year.

This means that home prices are falling at their steepest rate in 21 years. The 1.7 per cent slide is the largest since the index was first created. But, things may be worse ahead. Futures traders are betting that home prices will fall more than 20 per cent in prime markets such as San Francisco and Miami over the next year.

Futures contracts traded on the Chicago Mercantile Exchange (CME) show that traders expect double-digit declines in nine out of the 10 biggest housing markets in the US. The only exception is Chicago, where prices are expected to fall by ''only'' 5.6 per cent over the next year.
 
These predictions are not guaranteed to be accurate, but they do give insights into what people in the know think lies ahead. Predictive markets like this have sometimes proved surprisingly accurate in forecasting everything from housing prices to the outcome of presidential elections.

The housing downturn has inflicted considerable ''collateral damage''. Merrill Lynch and Citigroup have incurred multi-billion-dollar write-offs. Their CEOs have had to step down under pressure in recent weeks. On 27 November, Wells Fargo said it would take a $1.4 billion charge because of losses in home equity loans. Builders like Pulte Homes and Lennar have seen their financials and stock prices tumble.

In these circumstances, homeowners have very few options. A few of them would be willing to sell their homes at a loss to avoid greater losses in the future. Some analysts have said that declines of home prices up to 50 per cent were feasible during the ongoing downturn, before it bottoms out. For new US homeowners, whose net worth is mostly in their homes they bought during the recent boom, that is alarming news.