Home Prices Even More Horrid

It's tough to find good news in housing these days. If you listened to stock-dumping housing insiders like Toll Brothers (NYSE: TOL) CEO Robert Toll, you might believe that everything could be just fine, if it weren't for the media. (A few years back, when the media was pumping housing 24/7 and Bobby Toll was selling houses quicker than he could build them, his success was, no doubt, all his own.)

Sorry, Bobby, but if your company is languishing on the 52-week low list along with peers Ryland Group (NYSE: RYL), Pulte Homes (NYSE: PHM), Beazer Homes (NYSE: BZH), and Hovnanian Enterprises (NYSE: HOV), you'll have to take your media-bashing back to Econ 101.

Toll is doing badly because there are already too many houses out there, and not enough buyers. That means fewer units moving, and lower prices. Home builders are having "fire sales" and auctions because they must.

All over the U.S., home prices are dropping at a record pace, as confirmed by the S&P's Case-Shiller home price index for Q3. For the period ended September 2007, the index's 10-city composite shows a year-over-year drop in prices of 5.5%. The 20-city composite notches a 4.9% drop. Finally, the nationwide index shows a 4.5% drop. That number isn't just big, it's getting worse. You really have to look at the chart (launches a PDF) to see just how ugly things have gotten.

And remember, this index compares like-to-like sales, so it's an indicator of the kind of price depreciation that actual owners are experiencing. Other sales indexes that I've seen simply lump together sales prices (which are often juiced by big incentives not netted from the purchase price) and declare a median and average. Such methods don't adjust for additions and improvements made to homes (it's not a gain if you paid for it), nor do they attempt to compensate for shifts in housing mix.

That's an important way that unsophisticated home-price indexes can be knocked upward: In a climate where low-end buyers are having trouble getting financing, for instance, fewer cheap homes move. But the continued sale of higher-end homes to the wealthy would have the effect of pushing up median prices across an entire region, even if individual homes were going for less money than they got the year before.

That hissing sound you hear is the sound of "equity" rapidly escaping from U.S. homes. Given that mortgage-equity withdrawals have comprised a large portion of U.S. consumer-spending growth over the past half decade, investors need to pay close attention to this trend. The housing ATM may be worse than shut down. It may be actively sucking money out of consumers' pockets. Consider that next time your favorite stock looks "cheap."