Home Prices Could Fall 10 Percent Before Housing Market Recovery

While it is a long way from the Dust Bowl days of the Great Depression, the housing market is experiencing something it hasn’t seen since that time — a significant drop in home prices.

Many private economists say that home prices, which soared during the housing boom, will fall by around 10% before housing stabilizes sometime late next year. That decline will follow a 54% increase in median existing home prices during the prolonged boom earlier in the decade.

Prices won’t be the only thing falling.

Forecasters are also looking for sales and construction to drop further until the housing slump, which began in late 2005, starts to stabilize next year.

The problems in housing have been a serious drag on the overall economy — slashing more than a full percentage point off growth in some quarters. And those adverse effects will get worse in coming months, many private economists say, reflecting the fallout from the severe credit crunch that hit in August.

The betting is that the overall economy will be able to avoid a recession, but it will be a close call with the point of maximum danger still ahead.

“I think the housing market has got another year of very weak sales, falling construction and lower home prices. And all of that assumes that the economy holds together reasonably well and we don’t have a recession,” said Mark Zandi, chief economist at Moody’s Economy.com.

The biggest worry is that mortgage financing problems will grow even more severe, with soaring defaults dumping more homes onto an already glutted market, driving prices down further.

In a new report, the Joint Economic Committee estimates there will be 1.3 million foreclosures from mid-2007 through 2009 in subprime mortgages, loans provided to borrowers with weak credit histories.

Those foreclosures will wipe out an estimated $71 billion in housing wealth directly and another $32 billion indirectly by lowering the values of neighboring homes, according to the report by the JEC’s Democratic staff.

The report predicts that will end up costing states $917 million in lost property tax revenue through the end of 2009. JEC economists caution that their forecast is heavily dependent on how much home prices decline during the slump. If the downturn turns out to be worse, it will mean even bigger price declines, more foreclosures and more dollar losses in both home values and property tax collections.

Home prices have declined close to 4% from their peak set in early 2006, according to the Standard & Poor’s/Case-Schiller index. David Wyss, chief economist at Standard & Poor’s, says that before the downturn is over, home prices will fall by 11%, according to that gauge.

by MARTIN CRUTSINGER | ASSOCIATED PRESS