'Double dip' in home prices is official, and prices could drop more

Home prices fell sharply during the first quarter of 2011, according to the S&P/Case-Shiller index. The 'double dip' means they dropped below their Great Recession low point, reached in early 2009.

Amy Sancetta/AP
In this May 23 photo, a home is shown for sale in Chagrin Falls, Ohio. Home prices have reached their lowest points since the housing bubble burst in 2006, driven down by foreclosures, a glut of unsold homes and the reluctance or inability of many to buy.

A widely watched index of home prices has fallen to a level below its recession low point, an official sign that the US housing market is in a so-called "double dip" downturn.

Home prices fell sharply during the first quarter of the year, according to Standard & Poor's Case-Shiller index of US home prices. That leaves home prices below the bottom they reached early in 2009, as the United States was mired in a financial crisis and deep recession.

The news, released by S&P on Tuesday, confirms that the housing market is beset by ongoing challenges, even as the broader economy has stabilized and shown modest job growth this year.

The key problems:

Credit is tight for would-be buyers. Even though interest rates are low, banks are being unduly stringent in approving loans, say some real estate experts.

Uncertainty runs high. It's hard for potential homebuyers to make a major financial commitment if they feel uncertain about job security or about whether home prices will keep falling.

The supply of homes for sale is huge. The continuing tide of foreclosures puts downward pressure on prices, by keeping a glut of homes on the market at distress-sale prices. The problem feeds on itself, since many homeowners default in part because they see the value of their properties declining – leaving them with less incentive to make the effort to stay current on their mortgage payments and more incentive to let lenders take over the properties.

The foreclosure wave may have already peaked, but the numbers of loans in serious delinquency remain at historically high levels.

"Weak demand, foreclosures, and a glut of homes for sale should translate into at least another 5 percent drop in the Case-Shiller composite indices," economist Patrick Newport of the forecasting firm IHS Global Insight wrote in an analysis Tuesday.

He said a key reason that further price declines are "etched in stone" is that so many homeowners have seen their home values fall well below the balances due on their loans.

The Case-Shiller index of national home prices, which fell to a level of 125.41 for the first quarter, is still 25 percent above where it was in 2000. But adjusted for inflation, that means home prices are virtually unchanged over that time.

The index is down 34 percent from its 2006 peak, and down 5 percent from its level in the first quarter of last year. After the recession, home prices rose for a time, sustained in part by temporary federal incentives for buyers to enter the market.

Another index of home prices, released by the Federal Housing Finance Agency, is also down about 5 percent over the past four quarters. The FHFA index, because it showed less of a post-recession rebound, has already been in double-dip territory for more than a year.

Cyclical ups and downs are common within the economy and in real estate. What's unusual is for downturns to come in close succession. Hence the term double dip, which implies that the second slump has its roots in problems unresolved from the initial recession.

Lower home prices can be viewed as good news in some ways: Homes are more affordable than they were during the boom. If prices remain low, housing costs could become a smaller part of the typical family's budget.

But the trend poses challenges for the economy. Mr. Newport said the adverse feedback from home-price declines includes reduced consumer wealth, less home-building activity, more loan defaults, and falling property-tax revenue for local governments. It's also a cause of tighter lending standards, because banks see the collateral on their loans diminishing in value.

Of 20 cities tracked by the Case-Shiller index, some of the biggest declines since the low point of two years ago have come in the Pacific Northwest (Seattle and Portland, Ore.) and the Sun Belt (Las Vegas, Atlanta, Tampa, Fla., and Charlotte, N.C.).

The metro areas that have shown greater stability include Washington, Dallas, Boston, Denver, and California's major cities. But even these cities show price declines in recent months.

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