REPORT: Signs of a Bottom as Home Prices are back to 2003 Levels

Home prices fell to new lows in January, but the rate of decline appears to be easing, offering the latest sign that an elusive bottom in prices could be in sight.

Prices dropped by 0.8% for the three-month period ending in January, according to the Standard & Poor’s/Case-Shiller index that tracks 20 metro areas. While that dropped the index back to levels not seen since the end of 2002, the monthly decline improved from a drop of 1.1% in December and 1.3% in November.

“We expect that 2012 will go down in history as the year that the most severe house price crash on record ended.”

Separately, U.S. consumers in March remain confident about the economy and labor markets generally, but a broader index dipped as inflation worries jumped this month, according to a report released Tuesday.

Home prices tend to weaken during the winter months, when sales activity slows and the share of “distressed” home sales, such as foreclosures, rises. After adjusting for seasonal factors, home prices were flat in January compared to December.

The chart above shows the index levels for the 10-City and 20-City Composite Indices. As of January 2012, average home prices across the United States are back to the levels where they were nearly a decade ago – in early 2003.

Measured from their June/July 2006 peaks through January 2012, the peak-to-current decline for both the 10-City Composite and 20-City Composite is 34.4%. January’s levels are new lows for both Composites in the current housing cycle

Compared to one year ago, home prices fell by 3.8% in January. That also represented an improvement over the 4.1% year-over-year decline for December.

As of January 2012, average home prices across the United States are back to the levels where they were nearly a decade ago – in early 2003

Monday’s report “adds to other evidence that the housing market is on the mend,” said Paul Dales, senior U.S. economist for Capital Economics. “We expect that 2012 will go down in history as the year that the most severe house price crash on record ended.”

Home prices fell to new lows in nine cities, led by Atlanta, which is down by 14.8% from one year ago. But three cities posted annual increases: Detroit (1.7%), Phoenix (1.3%), and Denver (0.2%). On a seasonally-adjusted basis, half of the 20 markets showed flat or increasing prices in January when compared to December.

Housing markets still face significant headwinds. Nearly 11 million homeowners owe more than their homes are worth, and more than one million homes could sell out of foreclosure this year, putting pressure on prices. Moreover, credit standards are tight and show few signs of easing, leaving housing markets with fewer buyers at a time when more will be needed to soak up that excess supply.

Any stabilization in home prices, however, could offer a big boost to fragile consumer psychology. “When you ask people why are they in the market right now they tell you, ‘Because home prices have stopped falling in some sickening way,'” said Glenn Kelman, chief executive of Redfin Corp., a Seattle-based brokerage. “They worry they could lose a little bit, but there was a time you really had to close your eyes before signing an offer, and hope you weren’t going to lose 10% of your equity in 12 months.”As of January 2012, average home prices across the United States are back to the levels where they were nearly a decade ago – in early 2003

Inventories of homes for sale are down sharply from one year ago and sales of new and existing homes for the first two months of the year have posted sizeable increases compared to one year ago.

Most economists anticipate total levels of home construction and sales to increase this year, leaving home prices as the last metric that hasn’t yet reached a bottom.

Separately, homebuilder Lennar Corp. reported on Tuesday a 33% increase in orders of new homes during the first quarter when compared to one year ago. The three-month period ending in February saw its best first quarter sales figures since 2008. “We have seen the market stabilize, driven by a combination of low home prices and low interest rates,” said Stuart Miller, Lennar’s chief executive, in a statement.

The widely watched Case-Shiller index lags the market considerably. It reports sales contracts that were recorded for a three-month period ending in January, which means it reflects sales activity from last fall.

More recent indexes have reported modest stabilization for home prices. Home prices were flat in January on an index maintained by the Federal Housing Finance Agency. Median asking prices, meanwhile, were up by 6.8% in February from one year ago, according to Realtor.com, which tracks listing services in 146 metro areas.

For now, few economists are predicting a robust recovery. Analysts at Bank of America-Merrill Lynch last week revised their home price forecast, calling for a bottom in 2012 instead of 2013. But they also extended their timetable for any pickup in prices. They now say that won’t happen before 2014.

SOURCES: Wall Street Journal, Standard & Poors