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| For sale: A sign stands outside an existing home for sale in a Denver, Colorado suburb. Home prices fell for a record 12th
consecutive month. David Zalubowski/AP |
Historic fall in home prices
The decline, the biggest in the US since World War II, is deepening.
By Mark Trumbull | Staff writer of The Christian Science Monitorfrom the August 31, 2007 edition
Page 1 of 2
A historic decline in home values comes down to this: Even if you never signed papers on a risky loan during the real estate frenzy, you may now be paying a price.
In recent decades, it has been uncommon for US home prices to fall much, even during recessions. One government measure has never shown a year-over-year decline in its three-decade history.
But the current economy is far from normal – with the housing market in a period of persistent decline at a time when many other economic indicators are positive.
By one index released this week, home prices are down 3.2 percent from a year ago. Clear-cut gauges of US home prices only go back through the 1970s, but that decline probably exceeds any price drop since the Depression, except for one year during World War II. Economists say the trend could continue well into next year.
Net worth is falling for millions of families as a result. If consumers, feeling less wealthy, cut back on spending, the risk of a national recession would rise.
Why are home prices declining, when by many measures today's economy is much healthier than that of the 1930s? Basically, the good times for housing ran for so long, and prices rose so fast at the boom's peak, that it was unsustainable.
"This time, the problem with housing is not so much that interest rates became especially high.... It was that house prices became especially high," says Nigel Gault, an economist at Global Insight, a forecasting firm in Lexington, Mass. "What was unusual this time is that we had such a long period without any downturn."
This rare beast of a cycle makes it hard to know where prices are headed next. A year ago many economists were wondering if the housing downturn was near bottom. It wasn't. Now economists are again revising their forecasts downward.
This month, evidence began to pile up that the slump is growing longer and deeper. The inventory of homes on the market surged in July, according to the National Association of Realtors. And credit conditions for home buyers tightened dramatically, as lenders are no longer able to sell less-than-prime mortgage loans to investors.
The impact is sharpest for the borrowers who took out supbrime loans, and the lending firms that financed them (generally not traditional banks). But most homeowners nationwide are taking a hit.
Many recent buyers, those who purchased since 2004, had to pay artificially high prices for their homes, thanks to the easy credit conditions and a rising tide of speculators who fueled the home-price surge at its peak. Now their home equity may be lost amid the current credit squeeze.
Even longtime owners have lost some wealth. "You're losing some of that gain," Mr. Gault says. "It may make you a bit more cautious in your spending [and] less willing to tap home equity."
The cool housing market is already trimming consumer spending somewhat.
For all the bleak news, American homeowners and consumers can take comfort on several fronts:
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