Case-Shiller index makes the bottom of the housing market look more distant

S&P/Case-Shiller first quarter home price indexes released May 27 should be a reality check for anybody still arguing that the real estate market is bottoming out.

The national index showed that prices fell 14.1% from a year earlier — the biggest drop in 20 years. Sales of foreclosed properties are pushing down prices, especially in weak markets such as South Florida, Nevada, Southern California, Arizona and Rhode Island.

The problem isn’t just that prices are plunging. It’s that the inventory of unsold homes is growing and must shrink dramatically before a turnaround is possible. The number of homes available for sale jumped 10.5% to 4.55 million at the end of April, representing an 11.2-month supply at the current sales pace. Compare that to January 2005 when the market had a tight 3.6-month supply of homes.

Nationally, prices have returned to levels that haven’t been seen since June 2004 (though they’re still 60% higher than they were in 2000), David Blitzer, chairman of the index committee at Standard & Poor’s.

Blitzer said banks have finally gotten aggressive about cutting prices to remove foreclosed homes from their books and that’s pushing the index down.

“To get the housing market to turn around and stabilize, you have to have less supply out there,” Blitzer said.

The declines aren’t necessarily contained to a few bad markets – though only a handful of states are seeing massive drops. A recent report by the National Association of Realtors, which reported a 7.7% drop in first quarter median home prices, showed that prices in two-thirds of the more than 150 metro areas that it monitors were down.

Of course, not all markets are in free fall. Charlotte, N.C. actually saw an 0.8% gain in the first quarter compared to a year earlier, according to Case-Shiller.

Those looking for signs of a recovery will likely point to today’s new home report released by the Commerce Department, showing that new home sales jumped 3.3% in April – the first increase in six months. But the slight rise comes after a 11% drop in March.

Even the National Association of Builders saw little to trumpet in the data despite a slight reduction in new home inventory, which dropped from a seasonally adjusted 11.1 months supply in March to 10.6 months in April.

“The modest bounce-back in new-home sales recorded for April followed a sharp decline in March and belies the fundamental weakness that continues to exist in the nation’s housing market,” NAHB Chief Economist David Seiders said in a prepared statement. “Indeed, sales were down 42% on a year-over-year basis, the largest such reversal since September 1981. Our latest builder surveys actually show that home buying has not yet stabilized, and we are anticipating some further erosion over the coming months.”

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