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Bloomberg Press US Home Prices Drop for the First Time in 16 Years (Update2) By Shobhana Chandra May 29 (Bloomberg) -- Home prices in the US dropped last quarter for the first time in almost 16 years, as 13 out of 20 cities reported declines in March. The value of a house dropped 14 percent in the first three months of the year from the same period in 2006, according to a report today by S&P/Case-Shiller. The retreat may deter owners from tapping into home equity for extra cash, economists said. Combined with record gasoline prices, lower home prices raise concern consumer spending, which accounts for more than two-thirds of the economy, will slow. We don't see a big rebound in economic growth,'' said Scott Anderson, a senior economist at Wells Fargo & Co. The decline in prices may not be large enough to concern the majority of home owners, economists said. The drop in prices in the 12 months ended March pales in comparison to the 157 percent gain over the previous 15 years. Sellers are reducing prices to lure buyers as the supply of properties on the real-estate market grows. Rising foreclosures as subprime borrowers default on loans may add to the glut of unsold homes, delaying a recovery from the housing slump, economists said. Too Many Homes' The bottom line is, there are just too many homes on the market,'' said Christopher Low, chief economist at FTN Financial in New York. Home values dropped 14 percent in March from the same month in 2006, after declining 08 percent in the year ended February. This is a reaffirmation of the pullback in the US residential real estate market,'' Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, said in a statement. Shiller and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s. Shiller's 2000 book Irrational Exuberance'' predicted the stock market would slump and a second edition, published in 2005, said housing was in the midst of the biggest speculative boom in US history. Home-Price Futures Chicago Mercantile Exchange last year began offering futures contracts based on the S&P/Case-Shiller index covering 10 metropolitan areas. The March index covering transactions in 20 metropolitan areas, showed home prices dropped 03 percent from a month earlier, following a 04 percent decline in February. The figures aren't adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of month to month. Thirteen cities showed a year-over-year decrease in prices for the month, led by a 84 percent drop in Detroit home values and a 6 percent drop in San Diego. Home values rose 10 percent in Seattle and 74 percent in Charlotte. The group started keeping year-over-year records for the index in 2001. The National Association of Realtors said last week that the median price of an existing home fell 08 percent in April from a year earlier to $220,900. Commerce Department figures on May 24 showed the median price of a new home dropped 11 percent last month from April 2006, the biggest decline since 1970, to $229,100. The S&P/Case-Shiller index and another by the Office of Federal Housing Enterprise Oversight track the same home over time and more accurately reflect price trends, economists said. The gauges from Commerce and the Realtors group can be influenced by changes in the types of homes sold. Higher sales of cheaper homes relative to more-expensive properties will bias the figures down. Subprime A recovery in housing is being held back by a wave of subprime mortgage defaults, which is throwing homes back onto the market and prompting banks to tighten lending standards for borrowers with poor or limited credit histories. These data are probably only just beginning to reflect the impact of problems in the subprime mortgage market,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, in a report to clients. Earlier in the month, Chief Executive Robert Toll said that while fewer than 2 percent of the company's buyers use subprime loans, stricter lending standards are making houses at all price levels less affordable. This, in turn, can impact the entire housing food chain, including some of our potential customers' ability to sell their existing homes,'' he said.
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