The Rising Toll of Falling Prices
Home prices have fallen again. In fact, they've fallen below the recession's previous low, putting us into a "double-dip" for housing.
The S&P/Case-Shiller national price index dropped by 4.2 percent during the first quarter of 2011 from the last quarter of 2010, and it was down 5.1 percent over the first quarter of last year.
"This month's report is marked by confirmation of a double dip in home prices across much of the nation," said David M. Blitzer, chairman of the index committee for Standard & Poor's. He added, “home prices continue on their downward spiral with no relief in sight."
Kathleen Madigan writes in a Wall Street Journal blog that, "Prices have lost all the gains made in 2009 and 2010 when home buyers received federal tax credits. The index is back down to readings of 2002."
Some places have even seen worse price drops. "Atlanta, Cleveland, Detroit and Las Vegas are the markets where average home prices are now below their January 2000 levels. With a March index level of 100.27, Phoenix is not far off," Blitzer said. "The rebound in prices seen in 2009 and 2010 was largely due to the first-time home buyers tax credit," Blitzer said. "Excluding the results of that policy, there has been no recovery or even stabilization in home prices during or after the recent recession."
And as if that wasn't bad enough, economists from Capital Economics pipe in with this: "The further fall in house prices in the first quarter means that...prices have now fallen by more than they did during the Great Depression.” They add that “the remarkable thing about this downturn is that even though prices have fallen by more than in the Great Depression, the bottom has yet to be reached. We think that prices will fall by at least a further 3% this year, and perhaps even further next year."
The inevitable result will be more under-water homeowners and more foreclosures. More foreclosures typically lead to lower home prices, and that ugly cycle has been in full force since the housing bubble popped in 2006.
And unfortunately, the damage of falling home prices is not limited to just the housing market. Small businesses often suffer with drops in home prices, as it is estimated that up to a quarter of all small companies use equity from either a residential or other property mortgage to help fund their enterprises. It is commonly known that small businesses are responsible for generating a lot of new jobs, so any hit on small businesses is a blow for the employment scene.
The economy will also feel the effect of falling home prices as consumers who feel house-poor will be less likely to go out and spend, especially those who have been counting on their home as a retirement 'nest egg.' Already cash-strapped city and state governments will feel the pinch as well. Property taxes will decrease as home values continue to decline and homeowners challenge their previous tax assessments.
The one hope we can have is that home prices have now finally bottomed out, and the housing market can work its way back up from here. Let the second housing recovery begin!