October 28, 2010: The storm clouds have been gathering for months. Almost immediately after the expiration of the government’s tax credit for homebuyers, it became clear that American housing market stability had been remarkably dependent on the generous subsidy. Data on mortgage applications for purchase and new and existing home sales attested to a striking contraction in housing market activity. And eventually prices began to follow. In July, both of the national home price indexes published by S&P/Case-Shiller ticked downward after rising for much of the previous year. Data released this morning indicated that declines accelerated in August.
The broadest index, Case-Shiller’s 20-city composite, fell 0.3% from July to August (this data is seasonally adjusted), after sinking 0.2% the prior month. Home prices were still up year-over-year, but the pace of annual appreciation declined in August. On seasonally adjusted data, only 1 of the 20 cities surveyed enjoyed an increase in prices in August. New York, alone, had a rise in values for August—of 0.01%. Five cities experienced monthly price declines of greater than 1%, and in Phoenix values fell 2.2% just from July to August. Prices in Las Vegas fell yet again. Values in Sin City are at their lowest level since December of 1999, a drop of almost 60% from the peak of the boom.
Although America’s economy no longer looks on the point of collapse, it has failed to return to healthy growth. Unemployment, at 9.6%, is five percentage points higher than it was before the crisis and GDP is not growing fast enough to bring the jobless rate down. This economic slack is pushing inflation worryingly low. Core consumer prices rose a mere 0.8% over the past year. The Fed is therefore expected to announce a new round of asset purchases, widely known as QE2, at the end of its November meeting next week.