Home prices seen falling further before rebound

In fact, those inventory levels may understate the number of potential sellers — many of whom are holding their homes off the market and waiting for demand to recover.

“The question really is how many of these people actually have to sell their homes — how many forced sales are going to occur,” said Drew Matus, and economist at Lehman Brothers. “Usually with existing home sales, most people don't necessarily get stuck into that kind of situation.”

Many of those forced sales represent homes lost in foreclosure, which are typically sold quickly to get them off borrower's books, some at below-market rates.

Home builders are also reporting ongoing weakness. On Friday, the Commerce Dept. reported that new home sales fell sharply in the Northeast and remained weak in the Midwest. New home sales perked up in the West, lifting the monthly data to show a national sales gain.

But that reported rebound in the West may overstate the market’s strength, say some economists. The government figures track signed sales contracts, not closings. Builders have been reporting an increase in cancellations, which means that the home sales figures may overstate how many homes have actually changed hands.

Young says his cancellations are running about 40 percent — double normal levels. Young, who builds mostly entry level homes in Riverside and San Bernardino Counties, says it will be at least another 12-18 months before the market recovers.

“We think its going to take all of next year,” he said. “And we think we’ll see some normalcy in the supply demand mechanism in the first or second quarter of 2009. That’s my best guess.”

No one can predict how long that shake-out in the housing industry will take, and the recovery timetable — like everything in real estate — will differ from one region to the next. Markets that got hit early and hardest may get back on their feet sooner than others.

So far, the overhang of unsold homes has had a relatively mild impact on prices. Though the national median home price has declined from a year ago, the 0.6 percent drop has been relatively small. (Half of the homes sold were higher than that median price and half were below it.)

But those figures may overstate the real prices buyers are paying. Many sellers are making concessions like paying for improvements or repairs to close the sale. Builders are adding “free” upgrades like better-appointed kitchens to help maintain their asking prices.

Meanwhile, despite a strong U.S. economy, relatively good job growth and rising wages, demand for housing remains weak. Many of the first-time buyers — who would typically occupy the “move-up” buyers category of the market — are now facing defaults or foreclosures after they got in over their heads during a period of easy-money lending standards. Now that lenders are rapidly tightening up on credit, some new first-timers are being shut out of the market.

And some otherwise creditworthy buyers are waiting to see prices stabilize before bidding on a home.

"A lot of buyers we think are sitting on the sidelines to see how this is going to shake out as far as financing and price reductions," said Young, who is also president of the Building Industry Association of Southern California.

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