Economists Weigh in on Home Price Double-Dip

The S&P/Case-Shiller home price index confirmed a double-dip in home prices across much of the nation as ""Standard & Poor's"":http://www.standardandpoors.com national reading fell another 4.2 percent during the first quarter to hit a new recession low.

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The analysts at S&P say there appears to be no relief in sight as home prices continue their downward spiral.

If you take out the artificial rebound in 2009 and early 2010 resulting from the federal government's homebuyer tax credit incentive, ""there has been no recovery or even stabilization in home prices during or after the recent recession,"" according to the ratings agency.

Paul Dales, senior U.S. economist for the research firm ""Capital Economics"":http://www.capitaleconomics.com says the further fall in house prices during the first quarter means that ""on the Case-Shiller index, prices have now fallen by more than they did during the Great Depression.""

And should patterns continue to hold true, Dales notes that following the Depression, ""the peak in prices was not regained until 19 years after they first fell.""

Based on the Case-Shiller numbers, Dales concludes that home prices are now 33 percent below the 2006 peak, compared to the 31 percent decline endured through the Great Depression.

According to Dales, the similarities between the current downturn and that seen during the Depression are “striking.” On both occasions prices initially fell by 31 percent and, after a temporary rebound, then dropped back by 7 percent.

“The remarkable thing about this downturn is that even though prices have fallen by more than in the Great Depression, the bottom has yet to be reached,” Dales said. “We think that prices will fall by at least a further 3 percent this year, and perhaps even further next year.”

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Commenting on the latest Case-Shiller findings, Patrick Newport, U.S. economist for ""IHS Global Insight"":http://www.ihsglobalinsight.com, stresses that falling house prices damage the economy in several ways.

“They reduce wealth, which reduces consumer spending….They force lenders to tighten lending standards, since the collateral is depreciating in value off the bat, reducing existing home sales. They reduce state and local property tax collections, resulting in spending cutbacks,” Newport explained.

“They raise the level of uncertainty, which has made an increasing number of Americans think twice about participating in the housing market,” he continued. “Finally, they lead to more foreclosures, which in turn lead to further declines in house prices, which lead to more foreclosures, and so on.”

Home prices are dropping at a steady clip nearly everywhere, Newport says. He notes that with over a quarter of all mortgages underwater and 6.3 million homeowners either delinquent or in foreclosure “further declines in prices are etched in stone.”

“Going forward, our view is that weak demand, foreclosures, and a glut of homes for sale should translate into at least another 5 percent drop in the Case-Shiller composite indices,” Newport said.

S&P issued a report on the implications of a double-dip in home prices on banks’ balance sheets last week, ahead of the Case-Shiller release Tuesday.

Devi Aurora, a senior director within S&P’s financial institutions ratings division, points out that housing makes up about a third of the portfolios of the banking sector as a whole.

The ratings agency laid out a worst-case scenario of home prices falling by another 15 percent by the end of 2012, as opposed to S&P’s baseline projection of a 5 percent decline.

If that worst-case were to play out, Aurora says banks would take a hit of an additional $70 billion to $80 billion as a result of higher credit costs from rising foreclosures and delinquencies, a buildup of representation and warranty expense related to buybacks from investors, and lost income from fewer sales and originations as demand waned even further.

DSNews.com’s full coverage of the Case-Shiller report can be ""accessed here"":http://dsnews.comarticles/case-shiller-index-officially-double-dips-2011-05-31.