Home Prices Stabilize Further, But More Drops May Be in Store

Although home prices continued to stabilize in November, real estate experts believe we have another 5 or 10 percent of declines in store before values finally hit bottom. Home prices in 20 major cities declined 5.3 percent in November 2009 from a year earlier, a significant improvement over the 13.3 annual drop posted in July, according to the most recent S&P/Case-Shiller home price report. The figures, released Tuesday, represent the third month in a row of single-digit declines following 20 consecutive months of double-digit drops. But a number of factors--including the effects of a federal tax credit, still-elevated home inventories, and the prospect of higher mortgage rates--threaten to drag home prices lower from here. "On balance, while these data do show that home prices are far more stable than they were a year ago, there is no clear sign of a sustained, broad-based recovery," David Blitzer, the chairman of the index committee at Standard & Poor's, said in a statement. After the historic housing crash dragged real estate values down nearly 33 percent from the second quarter of 2006 through April of 2009, prices in 20 major U.S. cities have stabilized since. The improvement is rooted in several factors. First, lower prices have made home buying more affordable to many Americans who were priced out of the market in the boom years. Second, a Federal Reserve asset-purchase program has pushed mortgage rates down to near historic lows. Rates on 30-year, fixed mortgages hit 4.88 in November of 2009. Meanwhile, Uncle Sam's $8,000 first-time home buyer tax credit has helped prod would-be buyers off the sidelines. But a handful of market forces may work to bring prices lower from here. First, inventory levels remain elevated, says Mike Larson of Weiss Research. For example, the National Association of Realtors reported Monday that the monthly supply of unsold existing homes increased to 7.2 in December from 6.5 in November. While that's down sharply from the 9.3 months recorded a year earlier, it remains above the 6-month threshold that's more consistent with a balanced market. "It's a lot less bad than it was a year ago, but it is still not pretty," Larson said. And more inventory is on the way. Even if home sales pick up, the market will have to chew through additional properties that will arrive via foreclosure. "We see a big backlog of distressed properties that could come on the market in the next several quarters," said Celia Chen of Moody's Economy.com. "[Additional distressed sales] would of course cause home prices to fall again." Moody's Economy.com expects nearly 2 million foreclosure sales to take place this year. At the same time, the Fed program that has been instrumental in driving down mortgage rates is slated to expire at the end of the first quarter. Although the Fed could always resurrect the program if mortgage rates get too high, most analysts expect rates to climb from the rock-bottom levels consumers have enjoyed over the past year. Higher rates could siphon off housing demand and create downward pressure on home prices. Finally, the November Case-Shiller report "probably reflects residual effects of the homebuyer tax credit, which lifted prices in 2009," economists at Goldman Sachs said in a report. Home buying activity increased during November as consumers scrambled to get their transactions completed by the tax credit's original, November 30th deadline. (The program was later extended and expanded to include even current home owners who complete a sale by the end of June.) But the record 17 percent monthly drop in existing home sales recorded in December suggests prices may face renewed downward pressure in the wake of the tax-credit induced jump. "Demand has tapered off since the first tax credit expired, and the second tax credit, up to now, is having minimal effects," Patrick Newport, an economist for IHS Global Insight, said in a report. "So, despite the recent positive reports on housing prices, we believe that prices have further to fall--about another 5%." Chen, of Moody's Economy.com, suggests prices will drop even further. She projects a decline of 11 percent from current levels before prices hit bottom in the third quarter of 2010. Recent article published by US News Author: Luke Mullins 01/26/2010