Meet the Author

O. Emre Ergungor |

Assistant Vice President and Economist

O. Emre Ergungor

Emre Ergungor is an assistant vice president and economist in the Research Department at the Federal Reserve Bank of Cleveland. He is responsible for the household finance section of the Banking Policy and Analysis Group, which conducts research on regulatory policy and banking issues and provides advice on financial policy formulation. He also oversees the Federal Reserve System’s Muni Financial Monitoring Team (FMT), which monitors municipal bond markets, state and local funding, and public pension funds. Dr. Ergungor specializes in research related to financial intermediation, information economics, housing policy, and credit access in low- to moderate-income households.

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06.19.08

Economic Trends

Housing Values

O. Emre Ergungor

The Case–Shiller Home Price Index continued its rapid descent in the first quarter of 2008. Currently, it stands 14 percent below the peak it hit in the second quarter of 2006.

Home prices continued to deteriorate in the Cleveland metropolitan area. According to the Case–Shiller home price index, home prices are back to their February 2002 levels. In comparison, the well–publicized price collapse in the bubble areas (Miami and Las Vegas, for example) brought those prices back only to their 2004–2005 levels. In other words, people who purchased a house in Cleveland or Detroit in late 2002 would now take a loss if they tried to sell, but those who bought in Miami or Las Vegas could still turn a profit.

The Cleveland metro area differs from the bubble areas not only in terms of the hit it is taking to housing values but also in terms of which part of its housing stock is experiencing the losses. Recently, S&P began dividing the housing stock in most metro areas into three groups by home value. In the Cleveland area, for example, a third of housing stock is valued over $176,307 (depicted as “high” in the chart below), a third below $111,071 (“low”) and a third in the middle of these two values (“middle”). These thresholds will be higher or lower in other metro areas but in the end, they all capture the highest, lowest, and the middle third of local home values.

In the 1987–2005 period, the home price appreciation in the low end of the Cleveland housing market has been noticeable. Homes that are worth less than $111,071 appreciated by more than 6 percent per year. Annual appreciation in the high end of the market was a more modest 4 percent over the same period (nominal figures). However, the health of the market deteriorated dramatically after 2005. Since September 2005, the low end of Cleveland’s housing market has experienced 37 percent depreciation, compared to an 11 percent decline in the high group and a 15 percent decline in the middle group.

While home prices declined much more significantly in Miami and Las Vegas compared to Cleveland (they are down 28 percent in Las Vegas from their peak in August 2006 and down almost 25 percent in Miami over the same period), the declines have been slightly more pronounced in the higher-end homes. In Las Vegas, low–end housing units lost 23 percent of their value in 18 months. Higher–valued homes lost drop is 28 percent.

Similarly, in Miami, low-end housing units lost 22.5 percent of their value in the last year. The losses are around 23.4 percent for higher value homes.

As prices have fallen, so too has homeowners’ equity in their homes. An increase in equity extractions and low–downpayment purchases adds to the problem. Homeowners’ equity in their homes, as reported by Mortgage Bankers Association, dropped to 46.2 percent of the home value, the lowest level on record.

One negative consequence of declining equity is an increase in homeowners’ inability to sell their homes and pay off their mortgages or refinance their loans if the payments become too burdensome. As a result, mortgage foreclosures have risen sharply in recent quarters. While subprime adjustable-rate mortgages (ARM) look like the worst performers, even the recently originated prime fixed–rate mortgages (FRM) are performing uncharacteristically poorly, according to Loan Performance Corporation data.