Are home prices headed for another drop?
It's still a good time to buy. The end of tax credits and foreclosures will help keep home prices down.
In fact, even before the special tax incentive ended this spring, average home prices were already dipping after a relatively stable period in 2009. They've fallen about 3 percent in the past year.
Where prices head next depends on a kind of tug of war between two forces. An improving economy should lend support to the housing market, while a tide of mortgage defaults and foreclosures will exert downward pressure on home values. For now, the consensus view is that modest declines in home values lie ahead.
Why is the housing recovery so weak?
The short answer is that housing cycles can take a long time to play out. High unemployment and foreclosures have increased the number of sellers and kept many potential buyers on the sidelines. The Obama administration goosed demand for a while with a tax credit of up to $8,000 for first-time home buyers, but it's now expiring.
Government policies and the recession have had a big effect on the market. In April, about half the buyers of previously owned homes were first-timers, and 33 percent of all sales involved distressed properties such as bank-owned homes.
The Federal Housing Finance Agency's index of home-purchase prices, which has fallen 3 percent over the past year, is down 13 percent from its 2007 peak.
How low could prices go?
The worst declines have already happened, most housing analysts say.
"We have [the FHFA index] dropping another 4 percent and then turning around in 2011," with home prices rising modestly after that, says Patrick Newport, a housing analyst at IHS Global Insight in Lexington, Mass. "That's our educated guess."
The declines could be worse, he adds, if growing numbers of Americans choose to walk away from mortgages that are deeply "under water," with balances larger than the value of their homes.
Currently, more than 7 million mortgage borrowers are in a "negative equity" hole of 10 percent of more of the home's value, according to the data firm CoreLogic.
Still, a May online survey by Harris Interactive found that 59 percent of mortgage borrowers say they would not consider walking away from their homes no matter how deeply under water they are.