House Prices Plunge

Since sub-prime mortgage bubble burst in 2007, house prices have persistently declined. The sub-prime mess, which was originated by high interest rate, has adversely affected the financial market. Since then the credit market has gotten dry as lenders apply more prudent lending standards and are busy to consolidate their books.

Recent data from the S&P/Case-Shiller National Home Price Index for 20 cities revealed that home prices are falling at accelerated rate. After dropping 5.4% in the forth quarter of 2007, home prices fell again 7% in the first quarter ending on March 31th, 2008. As the end of the first quarter, the prices have declined 16.6% since their 2006 peak and have fell a record 14.1% from a year earlier.

Although house prices have become more affordable and mortgage rates have declined in the past few months, the demand of houses has been weak. Credit crunch has been the major culprit. Banks have been consolidating their balance sheet and tightening credit standards that have made more difficult for home buyers to get new mortgages.

Homeowners' net-worth has shrink significantly as their house prices decline. To compensate the declining net-worth, they need to set aside a larger amount of their disposable income. The declining house value has also left the owners with almost no opportunity to use their houses to tap home equity loan, which was traditionally source of extra cash. As the households feel poorer, they curb discretionary spending. As a result, these households’ misery would keep slowing down economy in the foreseeable future.

Chart: BusinessWeek