A "double dip" in home prices appears to be underway in the nation's biggest cities, jeopardizing the tepid U.S. economic recovery.
The widely followed Standard & Poor's/Case-Shiller Index, which tracks the real estate market in 20 major U.S. cities, showed that prices dropped 1.6% in November from the same month a year earlier, the second consecutive year-over-year decline. What's more, the index fell 1% in November from October, marking the fourth consecutive monthly decline.
Last year, a recovery in housing prices seemed to be on track. But analysts now say that that improvement was juiced by home-buying tax credits that have now expired. In addition, unemployment has remained stubbornly high and millions of Americans are still at risk of foreclosure.
A second slide in home prices would act as a drag on the economic recovery — and stand in sharp contrast to other downturns. During the real estate crash of the 1990s, for example, prices slowly but steadily rose from their bottoms.
"It is going to be a rocky bottom, where we bounce around," said Stan Humphries, chief economist at Zillow.com, a real estate information site. And, after that, "it is likely that real estate appreciation won't keep up with inflation."
The Case-Shiller Index, released Tuesday, showed that nine cities — Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, Portland, Seattle and Tampa — hit fresh bottoms, falling to the lowest levels since prices peaked in 2006 and 2007.
California's coastal cities and the nation's capital were the only apparent bright spots in the report, with Los Angeles, San Diego, San Francisco and Washington showing year-over-year gains. But when measured month to month, the index declined for every city except San Diego, which inched up 0.1% in November from October.
The performance of the California cities in the index doesn't reflect the state's hardest-hit markets, in the Inland Empire and Central Valley. Other recent home price measures show the market slumping statewide. The state's median home price declined 3.8% in December, according to research firm MDA DataQuick, marking the third consecutive year-over-year decrease after 11 straight months of gains.
"If it continues, then it is not a good sign," said Jacquelynne Chimera, an analyst who covers the California housing market for investment bank Keefe, Bruyette & Woods. "If we get into the spring selling season and prices are continuing to go down, that would be a cause for concern."
The renewed decline in prices means homeowners who have lost equity could be left unable to move to better neighborhoods or new job opportunities. These underwater borrowers — those who owe more on their properties than they are worth — are also more likely to abandon their obligation, experts said.
Falling home values result in what economists call a negative wealth effect, in which people are less likely to spend cash on discretionary goods because their homes have lost so much value that it shakes their financial confidence.
"Falling house prices hit household balance sheets and keep consumers reticent to spend," said Celia Chen, an economist with Moody's Economy.com.
John Blair of La Mirada would like to move to Washington state with his 2-year-old daughter and pregnant wife but they can't sell their three-bedroom, two-bathroom, 1,400-square-foot home for enough to cover the family's debt. The Blairs bought the house in 2007 for $540,000.
"We can't really get out of our home. We envisioned moving and possibly, hopefully, having some equity," said Blair, a 32-year-old eighth-grade language arts teacher. Now what the future holds "is an ongoing conversation."
An estimated 10.8 million households found themselves underwater at the end of the third quarter last year, according to Santa Ana research firm CoreLogic. The big number of homeowners in a negative equity position is holding back the market from improving because many of these people cannot trade up and buy a new home.
In some particularly hard-hit cities outside California, the most significant price declines are occurring among so-called starter homes, those usually purchased by first-time buyers, according to analysts and economists. Sales of lower-priced homes had been boosted by a federal tax credit of up to $8,000 for buyers during the second half of 2009 and first half of 2010.
That tax credit was apparently propping up the market in a big way, and prices are now quickly declining. Many economists expect that weakness will reach higher-priced neighborhoods.
"The bottom is collapsing in some areas, and falling sharply in many areas, and that will almost surely soon have an impact on the rest of the market," said Dean Baker, co-director of the Center for Economic and Policy Research. "People trying to sell are going to have a lot harder time selling, and the people who do sell are going to get considerably less than they expect."