Why Home Prices Are Double Dipping

Despite some encouraging economic news, the housing market hasn’t hit bottom yet.

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More bad news for the housing market cropped up in data released this week, indicating that home prices have double dipped, dropping to new post-Recession lows in March. The disappointing figures scale back incremental gains made in the wake of the 2010 home buyer's tax credit and reinforce the probability of a long, slow recovery for the housing market.

Standard & Poor's Case-Shiller Home Price Index, a leading measure of U.S. home prices, fell 4.2 percent in the first quarter, 5.1 percent below its level this time last year. According to the report, prices are down more than 33 percent from their July 2006 peak, slumping to near mid-2002 levels.

Those figures essentially blot out nearly a decade of home price appreciation and jeopardize an already fragile economic recovery. "This month's report is marked by the confirmation of a double dip in home prices across much of the nation," said David M. Blitzer, chairman of the Index Committee at S&P Indices, in a press release. "Home prices continue on their downward spiral with no relief in sight."

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Experts blame stubbornly high unemployment, a surge in foreclosures, and distressed sales for the continued slump, which has discouraged the prospective home buyers needed to soak up the excess supply of available homes.

Despite nascent signs that the economy might be on the road to recovery, the share of homeowners dipped to 66.4 percent in the first quarter of 2011, according to the U.S. Census Bureau, down from its peak of 69.2 percent in late 2004. Homeownership rates are back to 1998 levels, and with a sputtering housing market, experts say that level could dip further.

"Housing is expected to experience little more than a dead-cat bounce in the months to come," said Diane Swonk, chief economist at Chicago-based financial services firm Mesirow Financial. "We are still years, rather than months, from seeing any return to normalcy in this market."

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While prices in 12 of the 20 metropolitan areas tracked by the report—including Minneapolis, Chicago, and New York—fell to new recession lows, the nation's capital provided the only bright spot, with home prices up 1.1 percent in March and 4.3 percent over the past year.

The seat of the federal government and home to numerous universities, agencies, and nonprofits, D.C. has been fairly well insulated from the housing crash, says Mark Meyerdirk, principal broker at Washington, D.C.-based real estate firm Urban Broker LLC. "People in D.C. feel very comfortable with the market and are optimistic about the economy recovering," he says. "Job growth has been great here the past 13 months, so with those promising numbers the consumer confidence here is maybe greater than in other markets."

Seattle was the only other metro area to see a monthly increase—a modest 0.1 percent uptick—but prices in the Pacific Northwest city remained 7.5 percent off levels recorded a year ago.

Industry experts have noted that declines have become more regionalized over the past year, with the greatest price drops sinking markets in the Southeast and Southwest, as well as industrial Midwestern states such as Michigan and Ohio. But while areas swamped with foreclosures continue to grapple with the excess supply of homes for sale, areas less afflicted with distressed properties have seen bidding wars for turnkey properties, Swonk says.

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"When the housing bust hit, there was really nowhere to hide," Swonk says. "But as the housing market hits what some are calling a double dip, what we're seeing is there are some places to hide. You are seeing pockets like Washington now doing OK."

Although Washington may be the only metro area seeing a significant bump in home prices, many experts expect price declines to level off in the third quarter. When demand will pick up and reignite the fizzling housing market is another matter. "We feel we're about 12 to 18 months away from price stability," says Ken Shuman, head of communications at real estate information website Trulia. "The first sign of recovery would just be stability, not even price upswing."