Home prices: Worst drop ever, or a sign of hope?

Either the sky is continuing to fall, or the storm is abating. Or both.

Published July 29, 2008 5:21PM (EDT)

Bloomberg reports:

The S&P/Case-Shiller home-price index dropped 15.8 percent from a year earlier, the biggest decline since records began in 2001, after falling 15.2 percent in April.

The Wall Street Journal headline was similarly alarmist: "Home prices fell a record 16 percent from a year earlier in 20 major metropolitan areas ..."

But Felix Salmon scoffs at the year-to-year comparisons, noting that on a month-to-month basis, home prices dropped only 0.9 percent, after falling 1 percent in May. So the rate of price decline is falling, which might suggest the housing bust is reaching the bottom.

The focus on the year-on-year figures is silly. Look at the month-on-month figures to see what's going on now, and look at the percentage-off-highs for the big picture. The 12-month decline is of interest only to people who bought a year ago and are selling now, which is a tiny fraction of the population indeed.

But Barry Ritholtz at the Big Picture disagrees: No bottom in sight, and "prices are actually accelerating to the downside." Ritholtz has consistently argued that year-to-year comparisons give you a better sense of long-term trends than month-to-month patterns.

So which is it? Signs of a reprieve, or unrelenting doom?

I vote both. A 16 percent decrease in home prices over the past year inevitably ramps up the pressure on homeowners who are having trouble making their mortgage payments and are left with no viable refinancing options, as Time's Justin Fox pithily explains this morning. But if home prices continue to decline on a month-to-month basis by smaller and smaller amounts, then the year-to-year drops registered six months to a year from now will be correspondingly reduced. Then again, even a 1 percent drop month-to-month can add up to a pretty penny if it is sustained all year.

The point, of course, shouldn't be to argue which is the more relevant data point -- month-to-month or year-to-year -- but to figure out what the combination of the two tells us. And the answer to that is that the housing market is still in a world of pain.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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