In September 2010, US house prices, as measured by the Case Shiller Composite 20 Index, fell by a discouraging 0.80%m/m (seasonally adjusted). The market was expecting a decline of 0.4%m/m in September. This is the third consecutive monthly decrease in US house prices. Over the past year, house prices were up 0.6%y/y but are clearly losing momentum.
US housing and housing activity levels remain extremely weak, with many indicators at or near all-time record lows. This weakness include residential building permits as well as housing starts, new and existing home sales, the number of vacant houses and home inventory levels, the number of home foreclosures, and the number of mortgage applications for purchase. All of this weakness is despite the fact that the home affordability index is at its highest level ever recorded. The higher the affordability index, the more affordable housing is. The index is calculated using three variables namely, house prices, the cost of borrowing and household income.
The ongoing weakness in the housing market, which is undoubtedly the weakest part of the US economy, still has the potential to derail the fragile economic recovery, especially if there is a sustained 5% to 10% relapse in house prices. Currently more than 20% of all homes in the US are ‘underwater’ (in other words the market value of the house is less than the amount owing to the bank), which has contributed to an unprecedented rise in home foreclosures.
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