Demonstration against the foreclosure of Keith Sadler in Stony Ridge, Ohio on May 2, 2010. A disabled worker, Sadler is facing eviction by the Sheriff. Members of Moratorium NOW!, Take Back the Land and others stand in support.
Originally uploaded by Pan-African News Wire File Photos
Fresh Fall in Home Prices Is Headwind for Economy; Other Signs Still Strong
By S. MITRA KALITA
And SUDEEP REDDY
Wall Street Journal
A new bout of declining home prices is threatening to hamper the U.S. recovery, just as consumers and the overall economy have been showing signs of healing.
WSJ's Mitra Kalita discussed October's U.S. housing price decline with Yale University economics professor Robert J. Shiller, who says the struggling housing market will likely continue to weigh on the overall economy.
Home prices across 20 major metropolitan areas fell 1.3% in October from September, the third straight month-over-month drop, according to the S&P/Case-Shiller home-price index released Tuesday. Many economists expect the declines to continue into at least next spring, erasing most of the gains made since prices bottomed out in early 2009.
The housing market, which appeared poised for a recovery earlier in the year, now could be heading for a second downward drift.
"This looks like a double-dip [in housing] 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."
Other news in recent weeks, however, has offered hope the economy is on the cusp of strong, sustainable growth. Retail sales returned to levels seen just before the recession started in 2007. Manufacturing continues to expand. U.S. exports are back to where they were just before the financial crisis.
Optimism among heads of small businesses and large corporations is also near pre-recession levels. And tax legislation that includes a one-year payroll-tax cut for most workers has boosted prospects.
Yet the twin forces of 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 to 9.8% last month.
Job worries are hampering consumer confidence 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 in November, as consumers' views about job availability worsened.
The index, after rising through May as the economy showed early signs of improvement, now has retreated to its level of a year ago. The percentage of people planning to buy a home is also back to where it was a year ago, erasing improvement seen in early 2010.
U.S. Consumer-Confidence Index Slips
In the Case-Shiller data, all 20 cities in the index posted month-over-month declines in October.
As for year-over-year data, only four areas—Los Angeles, San Diego, San Francisco and Washington, D.C.—showed prices higher than in October 2009. Six markets hit their lowest since prices started falling four years ago, dropping below their spring 2009 levels, when most regions saw prices bottom out. The six were Atlanta, Miami, Seattle, Tampa, Charlotte, N.C., and Portland, Ore.
Prices in several markets, including Las Vegas and Cleveland, are nearly down to 2000 levels.
The housing index was driven down by factors including the expiration of a federal tax credit for buyers who signed contracts by April 30, which caused demand to fall off.
Prices also were weighed down by a huge inventory of foreclosed homes, which tend to sell at sharply discounted prices.
In recent months, according to the National Association of Realtors, foreclosure and other distressed sales have represented more than 30% of home sales—and more than half in some states, such as Nevada.
Wells Fargo & Co. projects prices will drop 8% more by mid-2011, given high supply. "Demand is still dead in the water," said Wells economist Sam Bullard.
Prices also face other hurdles: slightly rising mortgage rates, and homeowners who owe more on their houses than they're worth, and thus may walk away as values dip further.
The owners under pressure include 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 between 2006 and 2007, 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 are accepting that they won't recoup their losses anytime soon. Their interest-only loan is set to increase their current $1,600 monthly payment to $2,200 in seven years. If they were to default on their mortgage and walk away, they calculate that in about the same time, seven years, their credit scores would be stable 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."
Housing analysts agree that markets such as Sacramento, Las Vegas and parts of Arizona and Florida are at risk of more 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, a 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."
Homes remain a key part of Americans' wealth. Households held $6.4 trillion of home equity at the end of the third quarter, alongside $12.2 trillion in stocks and mutual-fund shares, according to Federal Reserve data.
For every dollar decline in housing wealth, consumers reduce spending by about a nickel in the subsequent 18 months, Moody's Economy.com chief economist Mark Zandi estimates. He cautioned that other factors, such as the stock market's strength and tax credits, could offset this effect.
"People feel poorer when their houses are going down in value," said Jack Fitzgerald, chief executive of Fitzgerald Auto Malls, which has a dozen locations along the East Coast. He is seeing many customers who could buy new cars choosing used cars instead, "spending as little as they can." While sales are improving, he expects them to grow only slowly, given all the consumer uncertainty.
Still, the overall economy's dependence on housing diminished greatly 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."
Write to Sudeep Reddy at sudeep.reddy@wsj.com
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