Home Price Decline Slows, But More Drops May Be Ahead

Home Price Decline Slows, but they still predict an average nationwide home price decline of 5%.  However,  some of the SoCal areas that are the best for investors have already bottomed out last year, and will not go any lower.  Regardless, this is a great time to buy, so make sure you don’t miss the boat…     Angella

The real estate market continued to heal in the final three months of 2009, as lower home prices, cheap mortgage rates, and a federal tax credit worked to juice demand. The development was visible in the S&P/Case-Shiller home price report released Tuesday, which found that the rate of annual home price declines improved again in the fourth quarter. Prices at the national level fell just 2.5 percent in the fourth quarter of 2009, compared with a year earlier. That’s notably better than the third quarter’s nearly 9 percent annual decline and a big improvement over the nearly 15 percent drop recorded in the second quarter. “As measured by prices, the housing market is definitely in better shape than it was this time last year, as the pace of deterioration has stabilized for now,” David M. Blitzer, chairman of the Index Committee at Standard & Poor’s, said in a statement.

While the news is encouraging, it’s unlikely that home prices at the national level have bottomed just yet. A handful of forces appear to be poised to drag values still lower. Here are three things you need to know about the development:

1. Recent improvement: Home prices in 20 major cities have improved since April, at which point they had declined nearly 33 percent from their 2006 peaks. This improvement is linked to several factors. First, falling prices made homes more affordable to many Americans who had been priced out of the market during the boom. Second, aggressive government intervention has succeeded in bringing mortgage rates down to very appealing levels, which made home buying even more attractive. Rates on 30-year, fixed mortgages averaged less than 5 percent in October, November, and December of 2009. Finally, the federal government in early 2009 enacted a tax credit worth up to $8,000 for qualified first-time home buyers. This too helped prod would-be buyers off the sidelines. “The crisis phase of this thing is over, but we are still cleaning up the mess,” says Mike Larson of Weiss Research.

2. Tax credit hangover? Home prices in December improved a better-than-expected 0.3 percent from the previous month on a seasonally adjusted basis. This improvement is notable because it occurred after the original deadline for the $8,000 first-time home buyer tax credit, which worked to pull some sales that would have otherwise occurred in December into earlier months. Existing home sales, for example, dropped nearly 17 percent from November to December. (The tax credit has since been extended and expanded to include even current homeowners who close a purchase by the end of June.) Some observers had expected additional pricing weakness to accompany December’s drop in demand. So why didn’t it materialize? Experts offered two possible explanations.

First, Patrick Newport of IHS Global Insight points out that since the Case-Shiller home price report uses three-month averages, the most recent monthly figures took into account sales from October, November, and December. “In October and November, demand was heating up prior to the expiration of the tax credit for first-time homebuyers. In December, demand tumbled,” Newport said in a report. “December’s [Case-Shiller] readings, thus, incorporate two months in which demand was picking up and one month in which demand plummeted.” Economists at Goldman Sachs also suggested in a report that the lack of pricing weakness may be tied to “the fact that Case-Shiller is based on three-month averages and hence still incorporates transactions completed during the final months of the tax credit.” A second explanation is that government housing rescue initiatives have slowed down the foreclosure process and prevented many distressed properties from hitting the market. “Everyone has all of these programs designed to keep foreclosures down, and so you housing slumphave fewer homes going into foreclosure and selling,” Newport said in an interview. “So that is probably skewing the housing numbers.”

3. Downward pressure: Despite the recent improvement, many housing experts expect home prices to fall. This outlook is rooted in several forces. First, the market continues to face a menacing overhang of inventory. Newport points to the Census Bureau’s homeowner vacancy rate, which remains near its record high of 2.9 percent. And while the Mortgage Bankers Association reported last week that the seasonally adjusted mortgage delinquency rate dipped slightly in the fourth quarter, it remains uncomfortably high at 9.47 percent. Finally, Newport remains concerned that many homeowners who owe significantly more on their mortgages than their properties are worth may decide to walk away from them in so-called strategic defaults. “We still think there’s a good chance a big wave of spring supply, including foreclosures, will push prices down again,” Ian Shepherdson, the chief U.S. economist at High Frequency Economics, said in a report.

Newport agrees. He predicts prices will fall roughly 5 percent before finally hitting bottom.

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