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Wall Street Journal
A new wave of falling home prices threatened to hamper the economic recovery, just as consumers and the overall economy showed signs of vigor.
Home prices across 20 major metropolitan areas fell 1.3 percent in October — the third straight monthly decline, according to the SP/Case-Shiller home-price index released Tuesday. The decline was expected to continue into at least the spring, erasing most of the gains made since prices bottomed out in early 2009.
“This looks like a double-dip is pretty much on the way, if not already here,” said David Blitzer, chairman of the Standard Poor’s index committee. “Somebody who thought last year that it’s going to be straight up from here was wrong.”
Several developments in recent weeks offered hope that the economy was poised for strong, sustainable growth: Retail sales returned to levels seen just before the recession started in 2007. Manufacturing continued to expand, and U.S. exports surged to levels from just before the financial crisis. Optimism among heads of small businesses and large corporations returned to pre-recession levels. Meanwhile, a federal tax-cut package — featuring a payroll-tax cut for workers — further helped boost prospects for economic growth.
But jobs and housing remain trouble spots. The labor market has added a million jobs in the past year. But that pace is far too slow to offset an unemployment rate that climbed last month to 9.8 percent.
Worries about joblessness are pushing consumer confidence lower, despite strength in holiday sales and a rising stock market. The Conference Board, a business research group, said Tuesday that its confidence index fell to 52.5 from 54.3 last month as consumers’ views about job availability worsened.
In the Case-Shiller housing data, all 20 cities in the index posted month-over-month declines in October.
Four areas of the U.S.— Los Angeles, San Diego, San Francisco and Washington, D.C. — posted year-over-year gains. But six markets hit their lowest since prices started falling four years ago: Atlanta, Charlotte, Miami, Portland, Seattle and Tampa. Prices in those areas slipped below the lows seen in most regions in spring 2009.
The closely watched housing index, which reflects average prices in August, September and October, was dragged by a number of factors, including slumping demand in part driven by the expiration of a federal tax credit for buyers.
Prices were also depressed by the huge inventory of foreclosed homes, which tend to sell at sharply discounted prices. In recent months, sales of foreclosures and other distressed sales have represented over 30 percent of all home sales, according to the National Association of Realtors. In some states, such as Nevada, foreclosures represent more than 50 percent of all sales.
Wells Fargo projects prices will drop 8 percent more by mid-2011 given high supply. “Right now, demand is still dead in the water,” said economist Sam Bullard. Home prices also face other major hurdles: rising mortgage rates; more foreclosures; and underwater homeowners ready to walk away as home values continue to plunge.
They included Tasha McLaughlin, a 33-year-old mother of two in Sacramento’s South Natomas neighborhood. She and her husband Steve bought their two-bedroom house in 2004 for $256,000, intending to stay about five years. After 11 months of trying to sell it, the family took it off the market.
“Everyone is saying we should foreclose or claim bankruptcy but I have a moral issue with that,” said Mrs. McLaughlin. “The more we try to pay the mortgage and pinch pennies, the more we get punished.”
Now, with a similar home down the block listed for $80,000, the McLaughlins were accepting that they won’t recoup their losses anytime soon. Their interest-only loan will increase their current $1,400 monthly payment to $2,200 in 2017. If they were to default on their mortgage and walk away, they calculated about the same amount of time would pass time — seven years — that their credit scores would stabilize enough to allow them to buy again elsewhere.
“I am just going to swallow my pride and walk out. I have to,” said Mrs. McLaughlin. “The market for homes is not going up.”
Indeed, housing analysts agree that markets such as Sacramento, Las Vegas and parts of Arizona and Florida remained at risk of even steeper declines.
“These places relied so heavily on mortgages and real estate for their economy that we’re going to see a two-tiered recovery,” said Chris Mayer, the Paul Milstein professor of real estate at Columbia Business School. “Luxury spending is not going on across the country. It’s happening among highly skilled consumers who live in the places that have seen some recovery.”
Some business owners are bracing for only slow growth in the economy as long as housing remains a drag.
“People feel poorer when their houses are going down in value,” said Jack Fitzgerald, CEO of Fitzgerald Auto Mall, which has a dozen locations along the East Coast. “And people’s houses are still going down in value.”
Mr. Fitzgerald said he’s seeing many customers who could buy new cars instead “spending as little as they can” on used cars.
Sales were up about 5% from a year ago after a sharp dive in 2008, he said, but they’re expected to grow only slowly given consumer uncertainty. “People are just being very conservative because they’re nervous,” he said. “When they’re uncertain of things, they tend to retrench.”
The economy’s dependence on housing has been greatly reduced since the financial crisis, said Ivy Zelman, chief executive of Zelman Associates, a housing research firm. “Consumers have shown us they can still spend even if home prices go down,” she said. But falling home values “put a lid on the recovery and the magnitude of it.”
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