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Home prices seen falling further before rebound

The latest data on the U.S. housing 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.  By's John W. Schoen
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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.

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.