Prices are down in 147 of 287 cities, government data-crunchers find. Plus, 10 housing experts offer insight on where the market is going.

A major government housing study today confirmed what has become more obvious by the day: House prices are sinking — and in some areas, sinking fast.

Home values in Ann Arbor, Mich., fell 5.7% in the third quarter alone, along with prices in 146 other metro areas. And year over year, prices fell in 83 of the 287 cities covered by data (.pdf file) released by the Office of Federal Housing Enterprise Oversight (OFHEO) for the quarter ending Sept. 30.

• Talk back: Is the real-estate downturn overblown?

The data underline a drumbeat of dismal housing headlines this week:

• RealtyTrac, which collects data on foreclosures, today reported a 94% year-over-year increase in foreclosure filings for October. There is now a default notice, auction sale notice or bank repossession for one in every 555 U.S. households — though that’s actually down from the peak in August.

• A respected gauge of home prices, the 20-city S&P/Case-Shiller Index, reported Tuesday that home prices fell 4.5% in the third quarter compared with the previous year, the fastest drop in the index’s 20-year history.

• Sales of existing homes, the largest share of the real-estate market, fell for the eighth straight month — by 1.2% since September and 20.7% since this time last year, the National Association of Realtors reported Wednesday. It said prices had declined 5.1% over the same period.

• Global Insight, a Boston-area economic analysis firm, predicts the foreclosure crisis will have “profound economic effects in 2008,” including a $1.2 trillion loss in home values and at least 1.4 million new foreclosures.

• The Calculated Risk blog quotes Goldman Sachs analysts predicting a “substantial” drop in home values nationally — about 15%, with possible losses in Florida of 30%. If a recession happens, prices could fall by 30% across the country, the report says.

The sky isn’t falling for most

And yet, housing experts urge homeowners to keep things in perspective: Although home prices have dropped from last year’s peak, they still retain most of the value gained in the price run-up from 2001 to 2006, says economics professor John Quigley at the University of California, Berkeley. (Compare the five-year and one-year appreciation rates for the OFHEO-tracked cities here; only one metro area — Detroit — is in negative territory.)Homeowners who don’t plan to sell in the next five years and who have stable mortgage payments that they can afford will ride out the storm just fine, experts say. The worst problems are in a handful of areas — the industrial Midwest, Las Vegas and parts of California, Florida and Arizona. If you’re buying, concentrate on finding a good value on a home you want to live in and can afford, figure on staying there for a good while and forget about turning a quick profit, Quigley adds.

One factor that might help: The limits on Freddie Mac- or Fannie Mae-guaranteed mortgages will stay at $417,000 for 2008, despite the drop in housing prices. The OFHEO announced that news Tuesday — along with separate data from the Federal Housing Finance Board’s monthly survey showing a $10,565, or 3.5%, year-over-year drop in the price of single-family houses purchased with conventional 30-year loans.

Stubborn trouble predicted

The big question is, whether you’re buying, selling or simply watching from the sidelines, how much longer will this go on? Experts polled offered little hope of a quick turnaround but suggested indicators to watch.

• Joshua Shapiro, chief U.S. economist for the economic analysis firm MFR, predicts the crash is “probably a multiyear event” that began in mid-2006. “We will be watching inventory data and surveys of lending conditions to try to gauge the bottom, but this is not going to be reached for many quarters,” he said in an e-mail.

• George Washington University economist Richard Green, author of Richard’s Real Estate and Urban Economics Blog, says predicting the turnaround is difficult because people’s expectations play such a big role. “So much of how things are going to look in the next couple years is a function of expectations,” he says, adding that “the psychology of the market is pretty bad right now.” His favorite predictor is the housing-price futures market on the Chicago Mercantile Exchange (free registration required). There, investors (or speculators) bet on trends in home prices in 10 U.S. markets. Their money’s on a slow recovery. This week, they wagered home prices would be about 8.5% lower, nationally, by May 2009 and 4.5% lower in Chicago, 12% to 13% lower in the San Francisco Bay Area, 16% lower in Miami and 12% lower in Las Vegas.

• Economist James Hamilton at the University of California, San Diego, expects price declines, “perhaps substantial,” in most markets over the next year. “Until the problems in the secondary mortgage market become resolved, I do not see significant improvements coming.”

• Economist Ian Shepherdson, chief U.S. economist at High Frequency Economics analysts, told readers of the firm’s newsletter that the rate of decline is “accelerating alarmingly.”

• Home values could fall by 30% nationally before the slump ends, according to Joseph E. Hasten, president and CEO of ShoreBank. “It will be at least a year before we see signs of a market recovery,” said Hasten through a spokesman. He’ll need evidence of a steady increase in home buying before believing the worst is over.

Visions of a midyear reversal

A couple of observers see an upturn in housing in mid-2008.

• “We are forecasting a bottoming out sometime after mid-2008,” says a spokeswoman for Freddie Mac, where economists are watching for home sales to pick up and prices to stop dropping.

• “I think, but it’s just a gut — there’s no data that can prove this to you — that things will turn around in 2008, that prices will stop falling, inventory will start decumulating and prices will come back. But that’s a gut. It could go into 2009,” says Karl “Chip” Case, economics professor at Wellesley College. With Yale economist Robert Shiller, he developed the S&P/Case-Shiller Home Price Index. This is typical of real-estate cycles and won’t last more than two years total unless a recession strings it out, he says.

• Quigley, the U.C. Berkeley economist, declined to guess how long prices will keep falling. He advises waiting before selling real estate, then re-evaluating in March. He’s watching for signs of turnaround in new-home starts, real-estate investment, single-family housing vacancies and house-price trends. “Coastal California is probably in for less of a disaster than the rest of the country,” Quigley says.

A couple of optimists

There are also some optimists. They, too, keep a careful eye on the data, yet draw different conclusions:

• Bernard Markstein, senior economist for the National Association of Home Builders, expects new-home construction starts to stabilize in the second quarter next year and begin improving in the third quarter. Sales of existing homes — the bulk of the market — should bottom out in the first quarter, rising in the second quarter, he predicts. “Yes, compared to some others, we are on the optimistic side,” he says. “We think that the adjustment is (moving) through, that some of the problems in mortgage finance will have been dealt with . . . that most, if not all, of the bad stuff is known.” The real unknown, he says, is consumer attitudes: “We are asking: When do consumers finally feel comfortable enough to re-enter the market?”

• The National Association of Realtors is understandably upbeat, too. “We think the current quarter is probably the bottom of the market,” says spokesman Walter Molony. In addition to Markstein’s reasons, he says, the jumbo-mortgage market is recovering after loan prices shot up, banks rejected applications and mortgage companies canceled as many as 30% of pending contracts in some markets.

• It’s not optimism, exactly, but foreclosure tracker RealtyTrac finds evidence that the pace of foreclosures has leveled off. October default notices were down nearly 9%, CEO James Saccacio said, indicating that some of the efforts to find alternatives to foreclosure may be starting to have an impact.

Some areas still appreciating

The newest report, released today by OFHEO, still shows prices grew, on average, 1.8% over this time last year. It’s a rosy picture compared with other prominent measures of housing value that show prices dropping. That’s because OFHEO does not include homes with mortgages larger than $417,000 and because it includes refinanced mortgages along with sales. OFHEO’s value to analysts is that it is the only tool that tracks values in such a broad number of cities and towns across the country.Last quarter, Ann Arbor, Mich. — home to the University of Michigan and some beautiful housing stock — lost the most value, 5.68%, from July through September, and 7.09% over the previous 12 months.

• Talk back: Is the real-estate downturn overblown?

But looked at year over year, the biggest losers of value were all cities in Florida and inland California, where speculation and overbuilding had chased after highly inflated local housing markets that eventually became saturated with too many high-cost houses.

Metro area	Quarter	1-year	5-year
Merced, CA	-5.37	-13	72.54
Punta Gorda, FL	-3.61	-11.79	71.04
Santa Barbara-Santa Maria-Goleta, CA	-4.64	-11.63	55.81
Yuba City, CA	-4.16	-11.13	70.11
Stockton, CA	-4.92	-10.03	65.07
Cape Coral-Fort Myers, FL	-4.14	-9.67	81.4
Sarasota-Bradenton-Venice, FL	-4.66	-9.63	73.28
Modesto, CA	-3.34	-8.95	71.07
Palm Bay-Melbourne-Titusville, FL	-4.74	-8.93	81.15
Sacramento-Arden-Arcade-Roseville, CA	-3.38	-8.41	56.9

Over the last 12 months, the strongest markets were smaller towns in the West (Washington, Utah, Montana and Colorado), with strong local economies and plenty of room to grow, and in Texas and North Carolina, with healthy regional economies.

Metro area	Quarter	1-year	5-year
Wenatchee, WA	0.7	15.7	79.01
Provo-Orem, UT	1.82	14.35	50.61
Grand Junction, CO	1.97	14.05	65.61
Ogden-Clearfield, UT	2.45	13.95	42.02
Salt Lake City, UT	2.44	13.37	60.17
Idaho Falls, ID	3.78	11.69	49.72
Austin-Round Rock, TX	1.21	9.67	28.82
Asheville, NC	1.97	9.44	55.46
Beaumont-Port Arthur, TX	1.23	9.44	33.27
Billings, MT	1.96	9.07	49.69

source

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