Home prices seen falling further before rebound

John W. Schoen Senior producer • Profile • E-mail

The latest data on the U.S. housing market — tracking prices and sales before a major financial storm hit the U.S. mortgage market — show continuing declines in both sales and prices.

And while prices have begun to fall along with sales, in many markets those prices will have to fall further before the market turns around, say economists, homebuilders and market analysts.

On Monday, the National Association of Realtors reported that sales of existing homes fell to a 5.75 million unit annual rate in July.

Prices, meanwhile, continued slide for the 12th consecutive month that home prices have declined, a record stretch. The median price of a home sold last month slid to $230,200, down by 0.6 percent from the median price a year ago. And that weakness has likely intensified in August after the financial storm that hit the credit markets earlier this month also tightened credit standards for mortgage borrowers.

"I think we've got another major leg down in the housing market, said Kenneth Heebner, portfolio manager for the CGM Realty Fund. "Basically, the nontraditional mortgage flow, which had been restricted up until August, disappeared. So I think it will be largely in price. I think the price declines which we've seen will accelerate and broaden. And it will last at least a year."

Some analysts say the price declines to date have been muted because sellers who can’t find a buyer at the price they want have taken their homes off the market and decided to wait, hoping that prices will recover.

"Even though prices are falling in a lot places, and even in the markets where they are falling, with we’re still dealing with the seller denial issue,” said Joel Naroff, President of Naroff Economic Advisors. “Either they don’t think they have to drop their price or they don’t think that have to drop the price nearly as much as they really do to clear the market.”

Though it remains to be seen how far prices will fall, some markets can expect to see significant drops from current levels, say analysts.

"We should be seeing, in some markets, 30 and 40 percent declines in prices," said Naroff. "We’re just not seeing it."

After years of double-digit returns, sellers are apparently having a hard time adjusting to the market’s new pricing realities.

“They haven’t got it yet," said John Young, a homebuilder in southern California. "We’ve had such nice equity run-ups, and you get accustomed to that. I think most sellers haven’t got the idea that to really sell their house they're going to have adjust their price down.”

One sign that houses aren't selling well at current prices levels is the 5.1 percent increase in the inventory of unsold homes in July to 4.59 million – about 9.6 months worth of supply at the current sales pace and more than double levels seen at the height of the housing boom.

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