End of home price slide in sight?

In many cities, prices are down by a more modest 5 or 10 percent.

One reason for the slower sales volume in the past few months may be that market participants are in a holding pattern, waiting to see what a new administration in the White House will do.

That was clarified recently when President Obama unveiled a plan to reduce foreclosures. It includes:

•Incentives for lenders to reduce payments for at-risk borrowers to 31 percent of income.

•Refinancing for many borrowers whose loans have turned modestly "upside down," with balances larger than the current home value.

•A proposal to allow bankruptcy judges to adjust loan terms, such as forcing banks to write down the principal balance.

If the plan succeeds in its goal of preventing several million foreclosures, it could help stabilize the housing market, some experts say.

"[Steps] to try to reduce preventable foreclosures … will reduce the supply of homes in the market," Federal Reserve Chairman Ben Bernanke said Tuesday in testimony to Congress.

He said the Fed is also having some success in efforts to bring down mortgage interest rates, which could help entice buyers into the market. With affordability now high, a key factor for home buyers is uncertainty about jobs. Access to mortgage loans is also constrained by the current credit crunch, Mr. Bernanke said.

Some experts say the Obama plan will have only a limited effect on foreclosures. For one thing, Mr. Davis notes, a key cause of foreclosures is a sudden loss of income, a problem the president's plan doesn't address. One approach might be to offer a government loan to help unemployed homeowners pay their mortgages while they find new jobs, he says.

Over time, he says, home prices tend to be correlated with rental prices – since people have a choice of whether to buy or rent. The price-to-rent ratio remains above its long-term trend.

There are some signs that, even amid the current real estate upheaval, market-participants are working toward a new equilibrium. In California, home prices have fallen 41 percent in the past year, but the discounts have lured more buyers into the market. Sales volume in December was up 85 percent from the same month in 2008.

"The faster prices reach levels that clear the market … the quicker this recession will be over," argues Scott Grannis, a California-based economist, on his website.

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