Housing Prices Fall to 2003 Levels, But Demand May Be Building

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It’s now officially a lost decade for home prices. With the release of the January data for the Standard & Poor’s/Case-Shiller Home Price Indexes, prices in a national composite dropped 3.8% from a year before, rolling back to the levels of early 2003.

The softness, which is a slight improvement from December’s 4% year-over-year drop, had been pretty much expected by a consensus of economists.

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But “expected” doesn’t mean “welcome.” On a year-over-year basis, prices fell in every major metro area surveyed in the 20-city composite except for Miami, Phoenix, and Washington D.C.

The factor continuing to pull prices down? The foreclosure mess. LPS Applied Analytics, a real estate data provider, notes that as of last month, a little more than 2 million homes are in foreclosure pre-sale inventory.

However, the good news is that the pace of existing home sales is picking up. It’s now at 4.59 million units annually as of February. If you picture the foreclosure mess as a bunch of coffee grounds spilled on a carpet, 4.5 million sales a year are the point at which buyer demand begins to switch over from attacking the problem with a Dustbuster to attacking the problem with a vacuum cleaner.

With unemployment down to 8.3%, the hope is that demand will surge still further in the coming months.

Traditionally, buyers come out like crocuses in the spring, and finish their relocations over the summer before a new school year starts.

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In this scenario, though, local markets can still be hurt quite badly. In the latest Case-Shiller numbers, Atlanta continues to get ground into the floor, with prices dropping year-over-year by an astounding 14.8%.

It looks like that’s due to more foreclosure competition. Foreclosure data provider RealtyTrac notes that in Georgia overall, nearly four out of every 10 sales in the last quarter were foreclosures.

As far as outlook, expect continued weakness in heavy foreclosure areas (read: Las Vegas) while “average” markets (say Chicago, where prices dropped 1.9% from the previous month on a non-seasonally adjusted basis) show a couple more months of poor numbers and then start to turn around.

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