Slide in U.S. house prices stokes recovery worries

(The Globe and Mail)

For the beleaguered U.S. housing market, the blows just keep on coming.

Fresh signs of weakness emerged Tuesday in the long-suffering real estate sector, renewing worries that housing will act as a drag on the broader economic recovery.

Housing prices slid 1.3 per cent in October from September, according to the closely followed S&P/Case-Shiller index, surprising economists who had forecast a smaller decline. Compared with a year earlier, prices also fell back, a sign of how persistent the sector’s problems remain.

Overall, U.S. home prices are still above their recent lows, touched in the spring of 2009. But Tuesday’s data raised the disturbing prospect that the worst may not yet be over. In six of the 20 metropolitan areas tracked by the index, prices dropped to their lowest levels since the collapse of the housing boom.

“The double-dip is almost here,” said David Blitzer, chairman of Standard & Poor’s index committee, a suggestion that housing prices could revisit last year’s trough. “There is no good news in October’s report. Home prices across the country continue to fall. The trends we have seen over the past few months have not changed.”

Housing is no longer as significant to the broader U.S. economy as it was prior to the recession and economists don’t believe that by itself the sector will derail the recovery. However, some fear it may languish for longer than anyone expected, undermining the economy’s health.

Earlier this year housing experienced an upsurge thanks largely to a hefty tax credit for first-time home buyers. After that measure expired, the underlying dynamics in the market returned with a vengeance, revealing a vast supply of homes and too few buyers, despite record-low mortgage rates.

This fall, a national controversy emerged over banks possibly using shoddy paperwork to force people out of their homes, underlining the pitfalls involved in working through the country’s immense backlog of bad mortgages.

Not every recent housing statistic has involved bad news. Sales of existing homes and new housing starts have recovered slightly since this summer. Some economists believe the market will improve gradually next year, spurred by a better employment outlook.

“We’re near the bottom right now in just about every housing statistic,” said Patrick Newport, an economist at IHS Global Insight. “I don’t think it’s going to get much worse.”

Another view is that the rot in housing is so deep it will take years to fix. The market will only stabilize when “supply falls sufficiently below demand to start making real inroads into the enormous inventory overhang,” wrote Yelena Shulyatyeva, an economist at BNP Paribas in New York, in a note to clients Tuesday. The bank predicts that housing prices will continue to drop in 2011 and 2012, falling 5 per cent in total from their 

current levels.

While that’s an unpleasant prospect, it doesn’t compare to the pain of the past four years, during which prices fell roughly 30 per cent, according to the S&P/Case-Shiller index.

Of the 20 U.S. cities tracked by the index, eighteen witnessed declining housing prices in October once seasonal factors were taken into account. The only cities where prices picked up were Washington and Denver. The hardest-hit metropolis was Atlanta, which registered a 2-per-cent drop in October, following an equally big decline in September.

Atlanta was one of six markets where housing prices in October hit their lowest level since the boom turned to bust in 2006 and 2007. The other five were Miami, Seattle, Tampa, Charlotte, N.C., and Portland, Ore.