The October data from the Case-Shiller index showed another sharp price decline, with prices in each of the 20 cities in the index falling from the prior month. However bad the picture appears, the current reality is likely somewhat worse. It is important to remember that the index averages sale prices over the three months from September through November. Sales contracts are typically signed 6-8 weeks before sales are closed. This means that the contracts for the homes sold during this period were mostly written up in the months July through September. Most data show the economy turning sharply lower in September, which means that two of the three months in which the contracts in the October index were signed preceded the sharp downturn. In other words, a more current picture of the housing market would likely show a much more rapid rate of decline. If the median contract in these data was signed in late August, then four months have since passed. If prices have dropped at a rate of 2-3 percent a month over this period, then house prices may already be 10 percent lower than indicated by the October data. Btw, the WSJ deserves credit for calling attention to Boston and New York as over-valued markets where prices likely have a long way yet to fall.
--Dean Baker
