Home Prices Continue To Fall Fast
The vicious cycle of falling house prices, subprime losses, increasing foreclosures and tighter credit continues. Stephanie Armour of USA Today wrote on May 27, that, according to the S&P/Case-Shiller's national index, home prices have experienced the sharpest fall in the 20-year history of the index. Economists warned that further declines are likely. "It's ugly," said Joel Naroff of Naroff Economic Advisors. "In major metro areas, we had the big (price) run-ups, and that's where we're seeing the record declines. Everything is working in the direction of more price declines."
Economist Patrick Newport of Global Insight agrees. "We do think prices will drop a lot more," Newport advised. "We forecast another 10% drop from current levels and bottoming out in 2009."
Prices continue to fall because of tighter lending standards, mounting foreclosures, and cautious buyers. "Buyers don't feel a whole lot of urgency and that creates a problem," says Ken Baris of Jordan Baris Realtors. "We're seeing many real estate businesses have closed and many agents have left the business."
Foreclosures: Escalating foreclosures are driving down home values because the lenders who have taken over the properties are cutting the asking prices on foreclosed homes. As a result, competing sellers are being forced to lower their prices to attract buyers.
Tighter Lending Standards: Falling property values have made lenders cautious about lending and therefore more selective in extending loans to buyers. Tighter lending standards have created a smaller pool of qualified buyers, thus swelling the supply of homes for sale.
Cautious Buyers: Potential homebuyers are unable to purchase a new home until they have sold their present one. Convinced that prices will drop further, would-be buyers have decided to wait a little longer before purchasing.
Falling prices reflect how far home values soared during the real estate boom, which ended in 2006. Compared with the figures for March, the Commerce Department said that sales of new homes went up 3.3 percent in April. Economists advise, however, that the rising supply of homes will depress new home sales and corresponding prices in the coming months.
"We got prices up to levels that were so unaffordable — the prices needed to fall," Naroff says. "If you'd asked 12 or 18 months ago if they needed to fall, I'd have said nationally 10 percent and in some areas 20 to 40 percent and that's what is happening. That's curative."
Mark Zandi, the chief economist of Moody’s Economy.com, adds, “Inventories of unsold homes remain much too high. Prices will have to fall more to raise affordability sufficiently to work off this inventory.”
