Good News: Home Prices Touch New Lows!

Real estate price declines help to get supply-and-demand metrics in line, stimulate home buying.


There's no way around it, the latest housing numbers are awful. But in the cruel logic of the nation's worst housing crisis in a generation, the sudden evaporation of millions of dollars in real estate value may be just what we need to get out of this mess.

The S&P/Case-Shiller home-price index—a closely watched indicator of the housing market's health—shows existing single family homes in 20 major U.S. metro areas saw prices drop by a record 10.7 percent in January from the same period last year. Even worse, 16 of the 20 metro areas witnessed record declines, 10 dropped by double digits, while only one—congratulations, Charlotte, N.C.—reported improvement.

"No markets seem to be completely immune from the housing crisis," David M. Blitzer, chairman of the Index Committee at Standard & Poor's, said in a statement accompanying the release.

Full report is here.

But as Michael Strauss, chief economist at Commonfund, explains, rapidly dropping home prices can be seen as a sour-tasting medicine for the nation's housing woes. "It's good news in a painful way," Strauss says.

The downward pressure on home prices, Strauss says, is rooted in the excess of housing inventory that was created during the market's boom. Before home prices can stabilize, that excess needs to be worked off.

On the supply side, the slowing pace of home building has helped. But there is still not enough demand to stabilize prices. "We now need to get an adjustment to get the unsold inventory sold," Strauss says. "And the way that that adjustment process is unfolding, prices have to come down to clear out excess of inventory."

The market is now in "the fifth or sixth inning of the adjustment process," Strauss argues.

Strauss points to the surprisingly strong February existing home sales report released yesterday as evidence that declining home prices are already triggering more sales. Yesterday's report showed sales were up nearly 3 percent nationally. "We are beginning to clear portions of the excess supply," Strauss says. "We just have a lot more excess supply to go through."

Some economists have questioned the validity of yesterday's report, arguing that the data are skewed by seasonal effects. Still, Strauss's logic is correct. But the big question, of course, is how much further do home prices need to fall to bring buyers back to the market in force.

"It will look better six to nine months from now than it does today," he says.