Reasons for Price Declines
An article based on Standard & Poor’s/Case-Shiller 20 city home price index released in January, 2011, reflects home prices dropping yet again in the nation’s largest cities and price drops are expected to continue as fewer people purchase homes and foreclosures dramatically increase. Most experts expect these price declines to continue through mid 2011 with prices decreasing another 5 to percent on average. The worst price drops are predicted to happen in cities with struggling economies and the highest foreclosure rates such as California and Arizona. Increasing foreclosures pushed the median price for a U.S. existing home to $158,800 in January, the lowest level since 2002, according to the National Association of Realtors (NAR). Simultaneously, sales climbed 22 percent from October and mortgage rates started to rise from record lows in November. When you add to that the excess supply of homes on the market, even more price decreases are imminent.
Waiting for Buyers
According to Trulia, Inc., a company that tracks how many homes listed for sale in a city have had a price reduction while waiting for a buyer, sellers are still lowering prices to sell their homes. In Arizona for example, Mesa and Phoenix have both seen enormous changes from year to year. Both cities had a 28 percent score a year ago with Trulia, but this month they hit 43 percent and 42 percent, respectively. In San Francisco, California, 29 percent of listed homes have had a price cut with an average price reduction of nine percent. In Oakland, 25 percent of listed homes are cheaper than when they were first listed with the average price cut there at 11 percent.
Fannie Mae Prediction
Fannie Mae, the largest mortgage-finance company, forecasts home prices will fall further this year and sales will jump. Discounts on foreclosed properties are eroding the values of other homes, making houses more affordable and opening the market to more people. An ongoing increase in sales may signal a bottom in values as prices fall to levels buyers can’t resist.
Tax Implications
Prices are falling again after fluctuating in 2009 and 2010 because of the federal tax incentives for home buyers. The credits cost $16.2 billion in tax revenue, according to the Government Accountability Office in Washington. One opinion has it that the tax incentives are why we are seeing such dipping prices and that without the tax credits, prices would not have been so unstable because they would have decreased straight to a bottom and we would be in recovery by now.
Worse Than The Great Depression?
Prices have fallen for seven straight months currently and are 31 percent below their 2006 peak, according to the NAR. The decline has exceeded the 27 percent price drop from 1928 to 1933, the worst years of the Great Depression, said Stan Humphries, chief economist of a Seattle-based real estate data company.
Existing home prices which are measured on an annual basis, will likely decline an additional 2.2 percent in 2011, according to Washington-based Fannie Mae. The median price for a new home may drop 2.4 percent, the company said in a February forecast.
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