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House of Cards: Why Falling Home Prices Augur a Double-Dip

If the housing sector is the canary in the U.S. economic coal mine, better grab your gas mask.

Home prices are taking an alarming dive, according to Clear Capital. Said Alex Villacorta, a statistician with the real estate research firm, in a statement alluding to the end earlier this year of a federal tax credit for home buyers:

At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.
After steadily recovering over the last year, home prices in August fell an average of 0.2 percent from July in 15 of 20 major cities tracked by the the closely watched Case-Shiller housing index (see chart at bottom). The Phoenix metropolitan area saw the greatest decline, at -1.3 percent, followed by Dallas (-1.1); Portland (-0.9); Boston and Seattle (-0.8); and San Diego (-0.6). Of the five cities in the index that saw a monthly rise in home prices, Detroit led the way with a 0.5 percent gain, followed by Chicago (0.4); Washington (0.3); New York (0.2); and Las Vegas (0.1).

By state, Idaho shows the greatest year-over-year decrease in home prices, at -14 percent as of August, according to market research firm CoreLogic. It's followed by Alabama (-10.4), Utah (-7.3), Oregon (-6.3) and Florida (-6.2). The five states with the highest rate of appreciation over that period are Maine (5.8 percent), New York (3.7), Connecticut (2.5) and South Dakota (2.1).

Although the Obama administration said in a report this week that housing shows "continued signs of stabilization," that smacks of either wishful thinking or, more likely, election-year spin. Nationally, August home prices fell 1.5 percent from a year ago, according to industry data that includes sales of bank-owned properties. And that trend is spreading. CoreLogic reports that home prices are decreasing in 78 out of the largest 100 metro areas, up from 58 a month ago. Weakening prices in places like San Diego is particularly troubling because it had recorded 15 straight months of growth.

At a conference earlier this month at the American Enterprise Institute, a Washington think-tank, New York University economist Nouriel Roubini (who famously called the financial crisis) predicted home prices would fall an additional 10 percent over the next 12-18 months, as a growing number of homeowners go "underwater" on their mortgages:

You have already 12 million houses that are in negative equity. Another 8 million are at loan-to-value ratio between 95 percent and 100 percent. Five percent changing price are going to put them into negative equity, so we'll have 40 percent, if not 50 percent, of all the 50 million of houses... into negative equity.
What's dragging down housing? Multiple factors:
  • Expiration of federal housing tax credit. The program that gave home buyers a rebate worth up to $8,000 ended in April. Although the initiative spurred housing sales and reversed the steep price declines of 2008 and early 2009, it did so largely by pulling demand for real estate forward in time, rather than stimulating additional demand.
  • Oversupply. Industry data show there are 3 million more vacant housing units than normal. Given the decline in home sales, that stock is likely to grow as growing numbers of foreclosed properties come to market.
  • Falling sales. Purchases of existing homes are down nearly 20 percent from the first half of the year. Although new home sales were up 6.6 percent in September, activity remains well below normal. The Mortgage Bankers Association expects total existing homes sales in 2010 to fall 8 percent compared with 2009; new home sales are forecast to fall 13 percent.
  • Weak lending. The MBA also expects mortgage originations, including new and refinanced loans, to fall from an estimated $1.4 trillion in 2010 to just under $1 trillion in 2011. That's the lowest level since 1996.
  • Fragile consumer confidence. While Americans reported feeling modestly more optimistic in October than in previous months, fears of worsening unemployment and falling wages remain intense.
  • Foreclosures. Exactly how the "robo-signing" scandal will affect the housing market remains unclear. Still, confusion over what impact it could have on foreclosure sales and on the ownership status of mortgages is likely to deter buyers.
Scary stuff. And since it's almost Halloween, here's something even more frightening to consider: The housing market is a leading indicator for economic recessions. Although we're not technically yet in dreaded "double-dip" territory, it certainly feels that way. GDP growth is shrinking, consumer spending is stagnant, credit remains tight and unemployment shows no signs of abating.

Even worse, policy makers trying to boost growth are running out of ammo. Fiscal and monetary policy hasn't worked as well as expected. Now the feds look set to pump up to an additional $2 trillion into the economy in hopes of finally getting it untracked.

The obvious question -- what happens if that fails -- relates directly to housing, of course. Because for homeowners, the question is no longer when home prices will finally rebound, but how low will they go.

Image from Wikimedia Commons, CC 2.0