Home prices drop a record 19 percent

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Yet another devastating data point for the U.S. housing sector.

Home prices in 20 U.S. cities declined at the fastest annual pace ever in January -- plunging 18.9 percent. Prices were weighed down by foreclosures and bank efforts to unload houses, according to the S&P/Case-Shiller U.S. National Home Price survey (pdf).

Housing slump far from over

The latest data provides more evidence that the nation's record housing slump is far from over.

Further, the index has fallen every month since January 2007. Home prices fell 18.5 percent in December 2008 on a year-over-year basis. What's more, home prices have now declined about 30 percent since their peak in 2006.

The study's co-author, Yale University economics professor Robert Shiller, is not optimistic about prices, at least in the near future.

"At this point it doesn't look great for the near-term," Shiller told Bloomberg Radio Thursday. "I don't give quantitative forecasts, but one thing [study co-author Karl] Case and I documented is that there is substantial momentum in home prices. Home prices are not stock prices. The real estate market is not efficient. It moves in trends. ...It is very trendy."

And right now that trend remains decidedly negative. Every city in the 20-city index registered a decrease in January, on a year-over-year basis.

Further, prices in the 10-city survey plummeted a record 19.4 percent on a year-over-year basis.

Economists surveyed by Bloomberg News had expected home prices in the 20-city Case-Shiller survey to decline 17.2 to 19.0 percent in January on a year-over-year basis.

The areas with the largest annual percentage declines were: Phoenix, -35.0 percent, Las Vegas, -33.5 percent, San Francisco, -32.4 percent, Miami, -29.4 percent, Los Angeles, -25.8 percent, and San Diego, -24.9 percent.

Year-over-year percentage price changes in other major U.S. cities were as follows: New York, -9.6 percent, Chicago, -16.4 percent, Boston, -7.3 percent, Washington, D.C., -19.3 percent, Atlanta, -14.3 percent, Dallas, -4.9 percent, Denver, -5.1 percent, and Seattle, -15.0 percent.

Index closely followed

Originally greeted by Wall Street with a shrug, S&P/Case-Shiller home price data rose to market-mover status in 2008 as it became clear that the United States' housing boom during the past decade was, in fact, a bubble fueled considerably by mortgage market excesses, from borrower to lender. The bursting of that bubble triggered record home mortgage foreclosures and mortgage back securities defaults (toxic assets), which led to the financial crisis that the U.S. and world are still trying to end today.

As a result, investors, economists, home builders, and homeowners alike now closely-monitor Case-Shiller home price data in order to discern clues as to when the housing slump may end -- a recovery that historically has contributed to U.S. GDP growth.

Housing problem: high inventories

The housing market's primary problem remains unsold homes stemming from 2008's very high home foreclosure level. Foreclosures jumped 29.9 percent in February from a year earlier after rising 17.8 percent in January, according to data compiled by RealtyTrac.

Inventories of both new and existing homes are 9-10 month levels at the current sales pace -- well above normal market inventories. Until that excess inventory has been worked-off, home prices are not likely to bottom, economists and real estate analysts agree.

Further, even though lower prices are beginning to attract buyers in selected markets, that additional demand is being offset by more-rigorous mortgage qualification requirements, and the outlook for the economy. Many people who would typically consider buying a home now are holding off, due to concern that the U.S. recession will force businesses to make more cuts. During recessions, both home and auto purchase decisions are typically delayed, and that has certainly been the case with the current downturn.

Falling prices delaying purchases

The experience of Mike Murphy's family is one example. His daughter Kelley and her husband Tom Stevens, expecting their first child, were set to buy their first home, a three-bedroom in the New York City suburb of White Plains, N.Y. Mike Murphy was planning in helping with the down payment.

"They need the space, with the new baby on the way, but it just doesn't make sense, given that prices are still dropping, and the economy remains weak," Mike Murphy said. "Tom's job is relatively safe [he's s civil engineer], but in this recession no one knows what's going to happen next. So they've decided to delay the home purchase for six months, hoping the economy improves."

Hence, economists generally agree that home buyer traffic -- and by extension, home prices -- are not likely to begin to bottom until citizens see a reduction in lay-offs.

"Arresting the slide in home prices will be key to ending the recession," John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, told Bloomberg News Thursday.

Housing Sector Analysis: There's no way to sugar coat it: very poor housing conditions persist. Home buyers remain sidelined on the U.S. economy's weakness, concerns about future layoffs, and the belief that housing prices will continue to decline. As a result, it would be optimistic to suggest a U.S. home-price bottom by the end of Q3 2009. More than likely, a bottom will not occur until Q1 2010. Further, given the importance of housing to the U.S. economy (at least historically), that suggests that an economic recovery would be hard-pressed to start before Q4 2009.

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