Record housing drop hurts coasts worst

By Marilyn Lewis

U.S. home prices in the last quarter of 2007 fell 1.3%, a record drop, a new government report shows.

The survey, by the Office of Federal Housing Enterprise Oversight, also reveals a stubborn strength in most of the nation's local markets, a stability obscured by the national figures and one that is frequently overlooked in discussions of the dire shape of the housing market.

"The states suffering the most are on the coasts," says OFHEO chief economist Patrick Lawler.

The 291-city report finds widespread declines, but the worst pain is found in California, where homes on average lost 6.7% of their value over the year; Florida, where homes prices declined 4.7%; and the desert Southwest, where overbuilt Arizona and Nevada continue to writhe.

Despite the drama in those places, though, prices in most of the rest of the country held up relatively well, losing less than 2% or even, in a few places, growing. The stability is found in the middle of the country, which never saw the stunning boom-year price increases that now are unraveling in former boom markets like Florida, California, Arizona and Nevada.

In eight states, house prices rose year over year: Utah, 9.3%; Wyoming, 8.3%; North Dakota, 7.8%; Montana, 6.9%; Texas, 6.2%; New Mexico, 5.4%; Washington, 5.4%; and Oklahoma, 5.1%.

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No one can promise that's the end of the story, though, Lawler says. Other economic developments have yet to play out, including the effect of a massive buildup of unsold homes in most markets. The inventory of houses for sale is historically large and still appears to be growing.

"How much further down that inventory will ultimately push prices will depend on a number of factors, including what happens to interest rates and the overall health of the U.S. economy," Lawler says.

"It's a perfect storm: Housing is heading down, and the economy is heading down with it," says economist James W. Hughes of Rutgers University. "2008 is certainly destined to be a lost housing year."

Closely watched indicators

A string of reports on the most recent statistics fleshes out the picture:

• Prices. The National Association of Realtors' report on fourth-quarter 2007 home prices (.pdf file) shows the median home price dropped to $206,200, down 5.8% from $219,000 the year before. More than half of the 150 cities tracked had falling prices compared with a year earlier. The latest S&P/Case-Shiller index shows prices plunging 7.7% year over year in the 20 cities tracked. Although it follows only a handful of cities, trend-watching economists favor this study because it includes all home sales, not just, as with OFHEO, those eligible for government mortgage insurance. Zillow, an online home-valuation company, reported single-family homes losing 5.5% of their value from the previous year in the fourth quarter; condominium prices dropped 7.4% in the fourth quarter.

• Inventory. In January, the backlog of existing homes for sale rose to 10.3 months, meaning that it would take that long to sell all of them at the current pace. (When supply and demand are balanced, inventories are at five or six months; the boom created inventories as low as three months' worth). That's considerably worse than December's 9.6-month supply and 53.7% more than at the same time last year, according to the National Association of Realtors. There's also a 9.6-month inventory of new homes on the market, 54.8% more than the year before, according to Census Bureau estimates. Foreclosed homes coming onto the market contribute to the swollen inventories.

• Foreclosures. Foreclosure filings -- including default notices, auction sale notices and bank repossessions -- continue to grow. In January, foreclosures grew by 8% from the previous month and 57% from the year before, according to RealtyTrac.

• Home-builder confidence. The National Association of Home Builders/Wells Fargo Housing Market Index takes the pulse of construction professionals every month. A number over 50 indicates their optimism for the new-home market. The index stands at 20 in February -- a bit better than a historic low, 18, in October and November, but 20 points lower than a year ago. The NAHB says members are cautiously optimistic because of slightly increased numbers of people touring model homes.

• Delinquencies.In the third quarter of 2007, 5.59% of mortgages (not including foreclosures) had late payments. It's the highest delinquency rate since the Mortgage Bankers Association report began 22 years ago and an increase of 0.92% from the same time in 2006.

• Housing starts. Builders began work on about a million new homes in January, slightly fewer than December and 27.9% fewer than the same time last year, according to the Census Bureau. "Eventually, such a huge drop in production will reduce inventory and allow the market to stabilize, but for now it's just pain, pain, pain," wrote Ian Shepherdson, chief economist for High Frequency Economics, in a recent newsletter.

The worst is concentrated

Bad as the national picture is, the national statistics are dragged down by some spectacularly poor local housing markets. For example, subprime adjustable-rate mortgage (ARM) delinquencies and foreclosures are rising in all states, but in most places the actual number of loans involved is fairly modest, says the Mortgage Bankers Association.

California alone has as many new foreclosures from subprime ARMs as 35 other states combined. And even in California, it's the overbuilt markets (such as San Diego, Stockton, Sacramento, Bakersfield, Chico and Fresno) that are seeing collapse while others are fairly stable.

Continued: Peering around the corner

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