- The Washington Times - Thursday, February 28, 2008


Two widely followed barometers of U.S. home prices experienced significant declines during the fourth quarter. These downward movements have increased concerns that America’s housing and mortgage sectors will soon cause consumers to reduce their spending. Such a development could send the economy into a recession, if an economic downturn has not already begun.

The S&P;/Case-Shiller national home-price index plunged 5.4 percent in the fourth quarter. During the entire year, the index declined 8.9 percent. The S&P;/Case-Shiller national index has now fallen six quarters in a row. Its level for the fourth quarter was 10.2 percent below its peak, which occurred in the second quarter of 2006. The 8.9 percent decline during 2007 was the steepest descent in the 20-year history of the series. Last year’s decline in the national index was more than three times the size of the annual decline (2.8 percent) that occurred during the 1990-91 housing recession.

Meanwhile, a key house price index compiled by the Office of Federal Housing Enterprise Oversight (OFHEO), which ostensibly acts as the regulator of mortgage giants Fannie Mae and Freddie Mac, declined 1.3 percent in the fourth quarter and 0.3 percent during all of 2007. The four-quarter decline in OFHEO’s index was the first since at least 1991, when the index was first compiled. Between the third and fourth quarters, prices fell in every state except Maine. Unlike the S&P;/Case-Shiller national index, OFHEO’s house-price index does not include home sales financed by either risky subprime mortgages, which are extended to buyers who generally have poor credit histories, or by jumbo loans (mortgages greater than $417,000 in 2007), which Fannie Mae and Freddie Mac cannot guarantee.

S&P;/Case-Shiller also provides home-price indexes for 20 metropolitan markets. “Wherever you look, things look bleak, with 17 of the 20 metro areas reporting annual declines,” noted Robert J. Shiller, the Yale University economist who helped create the index. “Looking closely at these negative returns, you will see that 14 of the metro areas are reporting record lows, and eight are in double-digit declines,” he added.

The national index soared by more than 90 percent in 2000-05, reflecting an average compounded annual growth rate of 11.3 percent in housing prices. During this housing-bubble period, millions of American households converted the soaring prices of their homes into ready cash through home-equity loans or mortgage-equity withdrawals (MEWs) while refinancing their home loans. The trillions of dollars in cumulative MEWs financed a consumption binge that kept the economy growing significantly faster than it otherwise would have. The understandable fear today is that this process may reverse itself as debt-burdened homeowners are forced to curtail their consumption because the value of their biggest asset — their home — continues to decline.

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