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Declining Home Prices - How Much Further Will Home Prices Drop?

If Tuesday's Commerce Department report on new home starts is any indicator of the dreadful condition of the housing market, home prices are nowhere close to bottoming out as we head into 2009.

New home starts plunged the most on record in November, declining 18.9% to a seasonally adjusted annual rate of 625,000. Annual October starts were revised down to 771,000 from 791,000. Month-over-month, the November decline was the most since 1984.

Building permits dropped to a record low, down 15.6% in November to a seasonally adjusted annual rate of 616,000. Permits for single-family homes declined 12.3% to a seasonally adjusted annual rate of 412,000, the lowest point since 1981.

Fallout from home prices under pressure is wreaking havoc on the economy. From copper producers who have to cut back on production accommodating declining demand in consumption of materials for home construction to the losses accumulated by holders of securitized mortgage loans, declining home values lie at the foundation of the economy's collapse.

How much longer will home prices continue to decline remains the $64,000 question. The painful process of deleveraging coupled with rising unemployment signals no near-term solution. For certain, stabilization in the housing market will be staggered considering regions of the country have been adversely impacted at differing rates. The top five states with the highest rate of foreclosure (Nevada, Florida, Arizona, California, and Michigan) make up the overwhelming bulk of declining real estate values, highlighting the regionality of the housing crisis.

The bright side of Tuesday's housing report is that analysts are looking for these types of dramatic declines in new construction. The oversupply of housing units in relation to demand has brought forth a new short-term equilibrium that builders failed to forecast leading up to 2007. On November 26th, the Commerce Department reported the median home price of a new home sold in October fell to $218,000, a 7% decrease from a year ago. The United States lost roughly $3 trillion in wealth during the third quarter, mostly due to the drop in home and equity prices. Until homebuilders can clear out their massive oversupply of inventory, home prices will remain in free-fall.

- by BetterTrades Financial Analysts

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