Home Value: Worst Is Over but Prices Could Drop, Case-Shiller Suggests

Case-Shiller infographic chartHere's the good news from Standard & Poor's about home prices: "I think this is a buying opportunity," says David Wyss, S&P's chief economist, "for most people buying a house that they actually intend to live in."

And here's the bad news: Wyss' advice comes with some big warnings. Beware of buying a home in an area with high rates of foreclosure. Prices will fall again in foreclosure cities so steeply that the overall Case-Shiller Home Price Index, S&P's closely watched survey, will fall 10 percent over the next winter.

Also, forget about buying a home if you expect home prices to ever rise again like they did in the housing boom. Wyss expects modest appreciation only, even after values bottom out this winter.

"The main value you should be getting from the house should be the value of living there," says Wyss.

Home prices up slightly for July

Overall home prices kept inching upward in July, as they have been doing for most of the last year, according to Case Shiller. The 20-city index is up 3.2 percent from last year.

But price are rising slowly. Compared to June, July home prices rose about half a percent. That's especially disappointing considering that July was the height of summer, usually one of the busiest time for home sales, and the index isn't adjusted for the season. (In the past, economists would adjust their statistics for the seasons using data from the preceding three years, but the last three have been so chaotic, S&P's economists say it's smarter to look at the data with no seasonal adjustment and simply apply a little common sense.)

"Prices have stabilized," says S&P's Wyss. "They are certainly not falling, but they are not rising at a sustained real growth rate, once you account for inflation."

Potential trouble as tax credit ends

That stability is likely to slip this winter in high foreclosure cities, dragging down the index overall. Wyss thinks the 20-city index will drop by 10 percent in the coming months, falling back to the bottom that it reached last spring, before prices finally start to rise again next year. "I expect prices to hit bottom between March and April," he says.

Wyss believes that prices will slip back to last year's low because of the recent expiration of the stimulus from the federal homebuyer tax credit. The tax credit added a significant amount of demand to the housing market over the last year. The end of that extra demand will put pressure on home prices, especially in towns glutted with foreclosed homes and homes going through foreclosure.

Search Homes for Sale
Browse through photos of millions of home listings or search foreclosure listings
In the meantime, not all markets are created equal. Wyss thinks prices will fall mainly in four metro areas: Las Vegas; Miami; Phoenix; and Tampa. These are cities in which developers built a huge amount of new homes during the boom compared to their existing populations. Many of the homes are now empty and in some stage of foreclosure.

A few other cities suffer from job losses that damage home prices. Mass layoffs in the auto industry led to a housing collapse in Detroit. Home prices also have been dented in Charlotte, N.C. where dominant employers like Wachovia and Bank of America laid off employees, and Portland, Ore., where the once-dominant tech industry has lost thousands of jobs.

In comparison, the rest of the country is in much better shape. "Take Peoria, Ill., and Fort Wayne, Ind., where I'm from. The prices have stabilized," Wyss says. Prices also have stabilized in the largest cities, like New York City, Los Angeles and Washington, D.C., where there was a shortage of new land to build new homes and condominiums, relative to existing housing stock.

"For most of the country, prices have effectively stabilized," says Wyss. "The price of a home has come down to relatively normal levels compared to income.... I think the worst is over for housing."

For more on home pricing, selling and buying, see these
AOL Real Estateguides:
Read Full Story

Find a home

Powered by Zillow