No sign yet of a bottom in home prices

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

When will home prices stop falling?

The answer is critical to millions of American homeowners who are watching their home equity melt away or are unable to move because falling values have sent potential buyers to the sidelines. Even if you don’t own a home, the question is central to your chance of getting a good night’s sleep if you’re worried about your job, your bank account or the investment in your 401(k).

In the latest evidence that prices are still sliding, the National Association of Realtors reported Thursday that the median price of existing homes sold in June fell to $215,000, down 6.1 percent from a year ago. Sales fell 2.6 percent from the month before — far more than analysts had expected.

Richard Gaylord, president of the Realtors, said a recent survey found that nearly one-quarter of potential home buyers are "waiting on the sidelines." A major housing package passed by the House Wednesday after months of debate could help boost the market by offering a credit to first-time home buyers, the group said.

But forecasting a turnaround in any financial market is a tricky business. And the current housing market is vulnerable to a variety of unique variables that make calling the bottom even tougher.

For starters, a lot depends on whether anything can be done to stop the ongoing wave of home foreclosures. As the inventory of bank-owned properties keeps rising, lenders have become eager sellers, hoping to get those properties off their books before prices fall further. For the same reason, potential buyers are either waiting on the sidelines or making fire-sale bids. A surplus of motivated sellers and a dearth of interested buyers is pretty much the formula for further prices declines.

With mortgage delinquencies rising, more foreclosures are on the way. The question is, how many? Some of those at risk of losing their homes got in over their heads or were sold loans they couldn’t afford. As the economy has worsened, households that might otherwise have held on are succumbing to job loss or rising food and energy prices that are busting their monthly budgets.

Congress this week finally passed a major housing bill after nearly a year of debate, but the measure is expected to help relatively few borrowers. The bill extends government backing and oversight to mortgage finance giants Freddie Mac and Fannie Mae to keep the mortgage market functioning, but that will do little to help existing homeowners at risk of default.

Then there’s the question of oversupply. As the housing market ground to a halt over the past year, homebuilders continued to build, hoping that the downturn would be short-lived. As a result, the inventory of unsold homes rose well beyond what was needed to meet demand. Until demand picks up, that surplus will continue to weigh on prices.

Despite rising foreclosures and skittish buyers, housing demand continues to grow every year through the creation of new households, whether from children moving out on their own, new couples getting together or couples splitting up. With current level of 111 million U.S. households growing by about 1 percent a year, new households will absorb about 1.1 million housing units a year, according to RDQ Economist chief economist John Ryding. That’s just about how much surplus housing is on the market. So even if new construction ground to a halt, it would take a while to work off that backlog.

“Bottom line, we probably have a year or more to go to grow into a better balance in the housing market,” said Ryding.

Home builders are still building, although housing starts for single-family homes fell another 5.3 percent in June to a 17-year low. Construction levels will likely continue to fall from current levels, according to Merrill Lynch economist David Rosenberg. He estimates that the excess inventory of new homes is nearly 30 percent higher than levels historically seen for a trough in housing starts.

“We may have to see as much as a further 30 percent decline (in housing starts) from here,” Rosenberg in a research note.

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