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The Big Dipper: How Much Lower Will Home Prices Go?

Welcome to double-dipland. Home prices, declining for the better part of a year, have sunk to a new post-housing bust low, according to the widely watched S&P/Case-Shiller numbers. They fell 4.2 percent in the first quarter and are down more than 5 percent over the last year. Nationally, prices are back to where they were in 2002.

And don't expect them to rise anytime soon, said S&P economist David Blitzer in a statement:

"The rebound in prices seen in 2009 and 2010 was largely due to the first-time home buyers tax credit. Excluding the results of that policy, there has been no recovery or even stabilization in home prices during or after the recent recession. Further, while last year saw signs of an economic recovery, the most recent data do not point to renewed gains.
Ouch. Although the plunge is nationwide, real estate in some parts of the country is holding up better than in others. Among the 20 largest cities tracked by S&P, Las Vegas has seen the steepest decrease in home prices, with a whopping 58.3 percent decline from their housing boom peak. Rounding out the top five hardest-hit metropolitan areas: Phoenix, with a 55.2 percent drop; Miami (50.4 percent); Detroit (46.1 percent); and Tampa, Fla. (45.7 percent). In Dallas, by contrast, prices have fallen a relatively modest 7.7 percent from their peak. Washington, D.C., is the only city where home prices have increased of late, climbing 1.1 percent over the last three months and 4.3 percent over the last year.

Glimpsing the bottom?
Economist Dean Baker and other housing experts think home values will fall an additional 10 percent before leveling out. That would bring prices back in line with their 100 year-long trend.

In some ways the latest decline is actually good news. It suggests that most of the air has already come out of the housing bubble, a prerequisite for the U.S. economy to finally recover in earnest. Goldman Sachs (GS) also notes that this year's decrease in home prices is "substantially smaller" than what occurred in late 2010. That weakness is also largely being driven by foreclosures and other distressed sales, rather than across-the-board deterioration in healthier segments of the market.

What specific factors are pushing down home prices? The same ones that were buffeting the sector last year, when the expiration of a federal housing tax credit effectively stole growth from future years. These include an oversupply of vacant homes, driven in part by the ongoing flood of foreclosures; weak demand for residential real estate; high unemployment; and wage stagnation.

Recession-busters: Housing and consumers
A major question for homeowners and real estate buyers is whether the fallout from the housing bubble has fundamentally changed attitudes toward homeownership. The percentage of Americans who own a house is now roughly 66 percent, down from a high of 69.2 percent in 2004. The ownership rate is expected to fall to levels last seen in the 1980s, or even earlier. As one expert told the NYT:

"The emotional scars left by the collapse are changing the American psyche," said Pete Flint, chief executive of the housing Web site Trulia. "There was a time when owning a home was a symbol you had made it. Now it's O.K. not to own."
That has major implications not only for the housing market, along with the industries that depend on it, but also for the greater economy. The twin engines of recovery following previous recessions have been consumer spending and housing sales. What's worrisome now is that the decline in home prices comes amid other economic danger signs, including, yes, a drop in consumer spending.

Falling home prices are a necessary step in the U.S. economy returning to "normal." In the absence of clear leadership in Washington, however, the new normal may be a far less economically hospitable place than it used to be.

Image from Wikimedia Commons, CC 2.0

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