Prices Post Biggest Drop in Two Years as Foreclosures Depress Market

Home prices in the U.S. continue to tumble. In recent months, that path of descent has become more precipitous as foreclosures claim a larger share of the market.
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Residential home prices slipped 2.5 percent during the first quarter of this year when compared to the previous quarter, according to a national index from the ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA), which is calculated using sales price information from mortgages acquired by Fannie Mae and Freddie Mac.

The GSE's purchase-only index shows that prices fell 5.5 percent between the first quarter of 2010 and the first quarter of 2011.

It's the largest annual drop recorded since the second quarter of 2009, and the largest quarter-over-quarter decline seen since the fourth quarter of 2008.

Economists were projecting the declines to be much smaller. Those at the research firm ""Capital Economics"":http://www.capitaleconomics.com say it signals that the housing downturn ""has gone from bad to worse.""

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""[P]rices in the first quarter fell at a faster rate than at any time since the height of the financial crisis in late 2008,"" said Paul Dales, senior U.S. economist for the firm. ""This time prices are not being driven down by a plunge in confidence and a sudden contraction in credit. Instead, they are being depressed by a chronic lack of demand and the effects of many foreclosed sales.""

Dales added, ""With the foreclosure pipeline still full, prices will fall throughout this year, and perhaps next year too.""

Dales says his firm's previously bearish forecast that prices would fall by around 5 percent this year may now prove too optimistic.

FHFA Acting Director Edward J. DeMarco shares Dales’ take on the latest numbers and the distress factor that’s contributing to the continued declines in prices.

“In many local real estate markets, particularly those hit hard by this cycle, foreclosures and other distressed properties are still a key factor in recorded and anticipated future sales and may be delaying price stability or recovery,” DeMarco said.

While the national, purchase-home price index fell 5.5 percent over the previous 12 months ending in March, prices of other goods and services rose 2.8 percent over the same period. As a result, the inflation-adjusted price of homes fell approximately 8.1 percent over the last year, DeMarco explained.

FHFA’s home price index showed declines in the first quarter in 43 states and the District of Columbia. The states with positive price growth were: Arkansas, Alaska, North Dakota, Vermont, West Virginia, and Wyoming. South Dakota’s reading was flat for the quarter.