The U.S. economy is expected to gain steam in 2011, but the housing market is sputtering again, with home prices falling in the nation's largest metropolitan areas.
Prices of previously owned single-family homes fell 0.8% in October from the same time last year, according to the Standard & Poor's/Case-Shiller index of 20 metropolitan areas. The closely watched index fell 1.3% from September to October as six metro areas hit fresh lows.
"It is grim, baby. We don't see any basis for sustained price increases in 2011," said Glenn Kelman, chief executive of online brokerage Redfin. "Prices are going to be in the doldrums all year, and usually you look for housing to lead the overall recovery, but that seems doubtful."
The year-over-year decline was the first since January and considerably worse than economists had expected. Because the index is an average of three months, meaning sales for August, September and October are included in the reading, many analysts saw the October drop as fresh evidence of a sustained downward move. On a month-over-month basis, October marked the third consecutive decline.
"The October decline is consistent with the idea that housing is going to double dip," said Mark Zandi, chief economist for Moody's Economy.com. "The broader economy is going to avoid a double dip, but housing has not been able to," said the prominent forecaster, who expects strong economic growth in 2011.
Dean Baker, co-director of the Center for Economic and Policy Research, predicts a sizable decline in home prices, led by entry-level homes, which had been snapped up by first-time buyers looking to cash in on the federal tax credit earlier this year.
"Price declines are accelerating and it is overwhelmingly at the bottom of the market, and it is totally consistent with the first-time credit having propped up prices," he said. "Basically, that effect is going in reverse now in a very big way."
The Case-Shiller index, created by economists Karl E. Case and Robert J. Shiller, is widely considered the most reliable read on home prices. The index compares the latest sales of detached houses with previous sales and accounts for factors such as remodeling that might affect a house's sale price over time.
The coastal cities of California and the nation's capital were the only apparent bright spots in October's report. Los Angeles, San Diego, San Francisco and Washington were the only cities that showed any year-over-year gains, but even those areas were weak when comparing October with September.
"California is the only state in the union that is up year over year, and it has had a pretty good bounce on the coasts," said Case, a Wellesley College professor. "I still remain cautiously optimistic about California — it could be the engine that gets the train going."
The performance of the California cities in the index doesn't reflect most of the state's overbuilding, which occurred in places such as the Inland Empire and Central Valley. The Golden State has also been able to work through its foreclosures relatively faster than Florida, for example, because of its streamlined repossession process.
"The California markets will see further decline, though I do think they are closer to a bottom than many of the other markets because they went through the housing recession earlier and they had sustained such steep declines from their peaks," said Stan Humphries, chief economist at Zillow.com.
Six markets — Atlanta; Charlotte, N.C.; Miami; Portland, Ore.; Seattle and Tampa, Fla. — hit their lowest levels since home prices started to fall in 2006 and 2007. That means average home prices in those metro areas have fallen below the worst of the declines seen during the worst of the financial crisis in the spring of 2009.
Every major metro area declined month over month, and the 20-city index was down 1.3% when the data weren't adjusted to reflect seasonal factors. Atlanta dropped the farthest, down 2.9%, followed by Detroit, 2.5%, and Chicago, 2%. San Francisco, which has exhibited robust appreciation during the recent bounce in prices this year, declined 1.9% in October. San Diego fell 1.5% and Los Angeles was down 0.7%.
Adjusted for seasonal factors, the index painted a similar picture, falling slightly less, down 1%, with only Washington and Denver eking out gains of 0.1% and 0.3%. Standard & Poor's has warned that such an adjustment lately has distorted the index because of the huge glut of foreclosures.
Several economists attributed the index's drop to the expiration of the federal tax credit for buyers in April. The main boost from that credit evaporated in July after deals closed, sending sales plunging. Sales have remained weak ever since. Both home sales and housing starts were weak in November, portending further declines when data for that month are reported.
"Neither is giving any sense of optimism," said David M. Blitzer, chairman of the index committee at Standard & Poor's.