By Jennifer Yousfi
The U.S. housing market is putting more pressure on an already weak financial system as home prices continue to sink, dragged down by high levels of inventory and risk-adverse lenders.
The Case-Shiller index – a survey of home prices in 20 major metropolitan areas – fell 15.9% year-over-year in June, Standard & Poor's announced today (Tuesday). However, nine of the 20 areas surveyed reported a gain in prices from the previous month.
"While there is no national turnaround in residential real estate prices, it is possible that we are seeing some regions struggling to come back, which has resulted in some moderation in price declines at the national level" David Blitzer, Chairman of the Index Committee at Standard & Poor's, said in a statement.
It's the fourth consecutive month of price declines, but some are hopeful the 0.5% decrease in prices from the prior month is a sign that prices are beginning to moderate – an indication the housing market is reaching its bottom.
"We're seeing a slowing in the pace of home-price depreciation," Guy Lebas, chief economist at Janney Montgomery Scott LLC in Philadelphia, told Bloomberg News. "The middle of next year is when we would expect to see some improvement."
But with housing prices down 18.2% from their peak in the second quarter of 2006, and rising foreclosure rates adding to an estimated 10.1 months of inventory currently on the market, it's too soon to be overly optimistic about the state of the U.S. housing market.
Despite the month-over-month gains of nine areas, prices in all 20 metro areas included in the Case-Shiller Index are in negative territory for the past 12 months, pointed out Mike Larson, a real estate analyst with Weiss Research.
"[The moderation] is not good news," he told CNNMoney.com. "It's just a little less bad."
In a separate report issued today, the Commerce Department said that new home sales increased by 2.4% on an annualized basis in July. But at 515,000, new home sales were still below mean economist expectations of 530,000 for the month.
In fact, the increase is misleading due to a downward revision in June's report, with most of the demand coming from the Northeast.
Many first-time homebuyers are waiting to make purchases, feeling housing prices have further to fall. At the same time, many current homeowners are upside down on their mortgages, owing more than their home is now worth, making it difficult for them to sell in order to buy a new home.
Even those who are ready to buy are finding it increasingly difficult to obtain the needed financing, as lenders that were badly battered by the subprime crisis remain risk-averse. Many banks simply don't have the needed liquidity to lend, as they hold onto cash assets in hopes of shoring up weak balance sheets.
Until the rate of buying picks up, the large number of homes available for sale will continue to put downward pressure on home prices.
"The inventory problem has not been solved," said Weiss Research's Larson.
With the close ties the housing market has to the U.S. financial market, continued weakness in home prices is much more than just a sector problem.
"For the financial sector to recover and the economy to revitalize, the housing market has to stabilize and home prices have to stop falling," Joel Naroff, president and chief economist for Naroff Economic Advisors, said in a note to clients.
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