Home prices in the nation’s largest cities fell in September, a widely followed index showed, underscoring the unrelenting weakness in the housing market that could last well into next year.
The Standard & Poor’s/Case-Shiller index of 20 American cities, a key measure that is closely watched by economists, declined 0.6% from August to September and 3.6% from September 2010. The drop ended five months of month-over-month gains.
Analysts had expected a decline in prices given the end of the busy home-shopping season. Nevertheless, the reversal of home-price gains casts a cloud over recent data that had shown some improvement in housing, such as increased builder confidence and an uptick in building starts. With the fresh home-price data released Tuesday, several analysts noted that a recovery remains out of sight this year.
“Any chance for a sustained recovery will probably need a stronger economy,” said David M. Blitzer, chairman of the S&P index committee.
Home prices, as measured by the 20-city index, are 2% above their bottom hit in April 2009 during the depths of the financial crisis. Prices briefly dipped below that threshold in March but began gaining ground again as the spring and summer selling seasons pushed prices up.
New foreclosure actions and weak demand probably will drive prices down an additional 5% to 10%, and perhaps more, if the economy slips into a double-dip recession, economists Patrick Newport and Michelle Valverde wrote in a research note Tuesday. The two, who track the U.S. economy for consulting firm IHS Global Insight, said the large number of people who remain behind on their mortgages and the high percentage of American homeowners who owe more on their properties than they are worth will also be a major drag on housing for the foreseeable future.
“Add to this the current high unemployment and underemployment rates, one gets a recipe for further price declines,” the economists wrote. “Should the economy slip into a recession … the unemployment rate will climb, driving foreclosures up and leading to an even larger drop in home prices.”
Even if prices begin to show some strength next year, they will probably continue to muddle along as foreclosures continue to cycle through the market, said Paul Diggle, property economist for Capital Economics.
“Even when prices do reach their trough, which could be next year, a continued influx of foreclosed and vacant properties onto the market will prevent the sharp bounce back that valuations might suggest is due,” he wrote in a note.
In a speech Tuesday at the Federal Reserve Bank of San Francisco, Federal Reserve Vice Chair Janet L. Yellen called for more housing stimulus.
“A sharp downturn in housing was at the core of the previous recession, and this sector continues to weigh on the recovery,” she said. “I see a strong case for additional policies to foster more rapid recovery in the housing sector.”
All of the California cities in the index posted price declines from August. Los Angeles and San Diego were down 0.8%, and San Francisco fell 1.5%.
Despite the declines, home prices in California cities measured by the index are comparatively healthy despite the state’s high unemployment rate. The markets tracked by the index are close to key job centers such as Hollywood and Silicon Valley and are also near the ocean, where overbuilding was relatively restrained.
The index does not track prices in California’s Central Valley or the Inland Empire, where housing is still weak and the foreclosure rates of many cities are among the nation’s highest.
Three U.S. cities posted new crisis lows in September, according to the Case-Shiller index. Both Atlanta and Phoenix joined Las Vegas in plumbing fresh depths. While Phoenix home prices are almost back to their January 2000 levels, those in Atlanta and Las Vegas have fallen below that benchmark.
A separate index by S&P/Case-Shiller measuring national home prices ticked up 0.1% from the second quarter, putting home prices at the same level they were at in the third quarter of 2003. The national index posted a year-over-year decline of 3.9%, which was better than the 5.8% drop in the second quarter.
The news that home prices had renewed their decline came as CoreLogic, a Santa Ana research firm that tracks the mortgage market, reported that more than 1 in 5 American home mortgages were underwater.
An estimated 10.7-million households, or 22.1% of all homes with mortgages, had more debt on the properties than they were worth in the third quarter, according to CoreLogic. This is a slight decline from the 10.9 million properties that were underwater in the second quarter.
“Although slightly down, negative equity remains very high and renders many borrowers vulnerable when negative economic shocks occur, such as job loss or illness,” CoreLogic Chief Economist Mark Fleming said. “The nearly $700-billion mortgage debt overhang has touched many corners of the market, and this overhang is holding back the recovery of the housing market and broader economy.”
Nevada led all states with 58% of mortgaged homes underwater, followed by Arizona, 47%; Florida, 44%; Michigan, 35%; and Georgia, 30%. This was the first quarter that Georgia made the top five, ousting California, which had been among the top spots since CoreLogic began tracking the data in 2009.
In the Los Angeles metropolitan area, 353,427 homes, or 23% of all mortgaged properties, were in negative equity at the end of the third quarter, a decline from 356,677. The number of homes with negative equity can decline when foreclosures increase because the repossession process extinguishes underwater loans.