Housing Bust Part 2: Home Prices Fall 3 Percent

Over the last quarter, home prices in the United States have dropped 3 percent. That’s the most significant decline since the housing market first started to implode, back in 2008.

I previously reported that many economists were revising their housing outlooks in a negative way, abandoning all hope for a housing recovery in 2011. We won’t see any real recovery until at least 2012, said the experts.

But recent data shows that things could be even worse. As it turns out, a 2012 recovery might be wishful thinking.

Zillow just released its Real Estate Market Report for the first quarter, and it’s ugly. In the first quarter of this year, U.S. home prices dropped faster than they have in any quarter since 2008. You will recall that 2008 is when the housing market came crashing down. Nationwide, prices fell by 3 percent (Q4, 2010 – Q1, 2011). Detroit was one of the hardest-hit cities, with a quarterly price decline of 5.2 percent. Translation: The first quarter of 2011 was the worst for home values since the housing crisis began.

Zillow’s market report is compiled from public data sources in 132 Metropolitan Statistical Areas.

Stan Humphries, chief economist at Zillow, doesn’t expect home prices to hit bottom until 2012, at the earliest. In the meantime, he says prices could fall another 8 percent. He’s not alone in his pessimism (or realism). Last month, the chief economist from Fannie Mae predicted that home prices in the second quarter of 2011 would be at least 5 percent lower than the first quarter. He had originally predicted a price decline of only 2.6 percent.

The Vicious Cycle of Price Decline

We are in a vicious cycle again. The number of homes for sale greatly exceeds the demand. This puts downward pressure on home prices. In order for home values to stabilize, we need to see less inventory and more demand. The problem is that it could take years for the current glut of homes to work through the system. Given the current rate of absorption (homes being purchased), some analysts are predicting a five-year overhang of housing supply.

Of course, if the foreclosure rate continues to rise, any hope for housing recovery moves further down the road. And that’s the real problem here — foreclosures.

At the end of the first quarter, more than 28 percent of single-family homeowners were underwater in their loans. Homeowners with negative equity have three choices: (1) stay in the home and hope to regain some value, (2) sell the home at a loss through a bank-approved short sale, or (3) walk away and let the bank foreclose. Judging by the foreclosure numbers for the last few months, I’d say there’s an increasing number of folks choosing the third option. This will drive inventory up and push stabilization further down the road.

And what about home buyers? They represent the demand side of the equation. Why aren’t they snatching up all of these “discounted” properties? With a handful of exceptions, housing prices are still dropping in most areas. And home buyers know this. That’s why they are reluctant to move forward. I read their emails daily. One of the most common questions we receive from our readers is: “When will it be safe to buy a house in my market?”

Thus, the vicious cycle continues. Inventory rises. Prices fall. And in most cities, would-be home buyers are sitting on the sidelines waiting for the market to hit bottom. At this point, it’s safe to say there is no hope for a national housing recovery in 2011. There’s a glimmer of hope for a nationwide recovery in 2012. My money is on 2013.