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Home Prices Fall Again, Sabotaging Recovery Hopes

By Martin H. Bosworth
ConsumerAffairs.com

May 29, 2007

Standard & Poor's Case-Shiller index for home prices found that sales of existing homes in 13 metropolitan markets either showed price cuts or slow appreciation. Formerly hot housing markets such as Boston, Washington, D.C., and San Diego showed sharp price declines.

Other areas, such as Portland, Ore., and Seattle, showed price gains, but at more modest rates than previous estimates from 2006.

Analysts attributed the price drops to several factors, including excess inventory of unsold homes, and the rising tide of foreclosures and defaults among homeowners trapped in costly "creative" mortgages.

Lower home prices, coupled with high gas prices and higher costs of goods, may scare consumers away from cashing out their home equity for financing other loans or spending projects.

Home prices and sales have been on a rollercoaster in recent weeks throughout the country, with sales of new homes posting a strong 16.2 percent gain in April 2007. But the gain was attributed primarily to struggling home builders slashing prices in order to reduce their stores of unsold homes, even as sales of existing homes continued to sag.

Nouriel Roubini, chairman of Roubini Global Economics, said that the home sales spike in April was not any sign of good news for two reasons.

"[F]irst, the excess supply of new homes is still so large that only much lower home prices will dent this overhang," he wrote. "[S]econd, lower home prices means lower home equity and lower home wealth for homeowners."

The frenzy of homebuilding during the boom years of the housing market has left so much unsold inventory that David Seiders, chief economist for the National Association of Home Builders (NAHB), recently said it might take until 2011 to match peak levels.

"We're still being hit pretty hard by the subprime-related mortgage market problem," Seiders said.

At the height of the recent housing boom, a combination of lax lending standards and low interest rates led many financiers to offer home loans to their subprime customers, traditionally deemed too risky for "prime" lending terms. Many eager homebuyers signed on the dotted line without realizing that their low rates would double or triple in a few years' time.

As home values continue to drop and mortgage payments continue to rise, many lenders are quietly working with overextended borrowers to modify their loans and prevent even more defaults, while many of the formerly successful subprime lenders such as New Century are being sold on the auction block or drastically cutting back on their business.

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