October Home Prices Offer Hope and Caution

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The rate of decline for house prices has stalled, according to the latest S&P/Case-Shiller Index of home sale prices in 20 U.S. cities. Released Tuesday, the report for October shows prices in 13 cities held their own but remained almost flat. Still, flat is better than a continuing dip. Seven cities had month-over-month gains, and all 20 continue to show improvement on a year-over-year basis.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%The index rose slightly by 0.4% from its September level, to 145.36 in October. But it's down 7.3% from October of last year, about in line with consensus estimates.

"All in all, this report should be described as flat," says David M. Blitzer, chairman of the Index Committee at Standard & Poor's, in press statement released with the report. "Coming after a series of solid gains, these data are likely to spark worries that home prices are about to take a second dip." However, Blitzer also noted that "Before jumping to conclusions, recognize that the one time that happened, at the beginning of the 1980s, Fed policy saw dramatic reversals, which is very different from the stable and consistent Fed policy we have today."

Blizter adds that existing-home sales have been very strong in recent months, but that starts remain weak and fears remain about what might happen when government programs aimed at the housing market expire in the first half of 2010.

The Middle and High End Could Fall Further

Overall, the forces driving the housing market seem to be nearing stabilization, but many factors could send prices back down. With prices now at August 2003 levels, many people own homes worth less than they paid for them.

Some experts expect home prices to drop another 10% before the bust ends, but they foresee most of the lost value coming from homes in the middle- and high-end price range. The worst of the subprime crisis in lower-end homes appears over. But adjustable rate mortgages and Alt A mortages (those that required minimal documentation) mainly financed middle- and high-end homes. More defaults are likely as adjustable-rate loans reset over the next couple of years, adding to the weight on home prices at the higher end.

For example, such homes in the San Francisco are down just 25% from their peak, while the broader regional market is down 39%. Experts expect that gap to narrow.

Yet, even San Francisco has reported seven consecutive months of positive returns according to the S&P Case-Shiller Index. San Diego has reported six consecutive months of improvement, and Los Angeles and Phoenix are close behind with five months. The two cities with the best results were Phoenix and San Francisco -- both improving more than 1% month over month. Minneapolis and Portland are no longer reporting double-digit declines. Denver and Dallas are nearing positive territory, with their annual figures at -0.1% and -0.6%, respectively.

Las Vegas is the only market still hard hit. Prices have declined for 38 consecutive months, with a peak-to-trough reading of -55.4%. That means prices are now barely 5% above their January 2000 level. At the peak in August 2006, the average home price was 135% higher than now.

Wanted: A Successful Mortgage Modification Program

Hard as it is to say flat is good, that's clearly better than a continuing fall in prices. With millions of foreclosures still likely to hit the market, the big question is whether the index will take another fall. If the government and banks can finally implement a successful mortgage-modification program, housing could be at the bottom.

But any such program must come up with a way to help the unemployed to stay in their homes. Congressional leaders are pushing to use leftover money from the Troubled Asset Relief Program for mortgage relief for jobless Americans. Rep. Barney Frank (D-Mass.) wants $3 billion to be allocated for this purpose. His proposal is similar to a Pennsylvania program that's more 20 years old, which offers unemployed workers low-interest loans to pay their mortgages. It makes borrowers eligible for loans of up to $60,000 that can be repaid over an extended period with payments as low as $25 a month. The Pennsylvania program has helped about 80% of its participants to stay in their homes.

Keeping people in their homes helps everyone. Fewer foreclosures on the market will mean home prices fully stabilize and eventually head back up.

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