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Carnage not over in U.S. housing industry Add to ...

Bloodied though it may already be, the U.S. housing industry is in for still more.

Tuesday, the latest reading of the widely watched S&P/Case-Shiller home price index showed house prices slipping again in December, falling a further 0.4 per cent from November despite better economic signs from the world’s largest economy.

That shows the U.S. real estate sector firmly in a double-dip, economists say, and some believe the carnage isn’t over.

“The second leg in house prices that began last year will continue throughout this year and take prices to a new cycle low, some 5 per cent below current levels,” Paul Dales, the senior U.S. economist at Capital economics, said in a new report.

“If a vicious circle of falling prices and rising foreclosures were to develop, prices would fall much further.”

Economist Alistair Bentley of Toronto-Dominion Bank, agreeing U.S. home prices will probably reach a “new cyclical low” this quarter, pointed out that a stunning 4.6 per cent of U.S. homes are in foreclosure. The record levels of foreclosed homes on the market will continue to drive down prices, he said, though he added such properties may be skewing the performance of the overall market.

“At this point in the housing cycle, declining prices are not necessarily the best gauge of the broader housing market given the disproportionate share of sales from distressed properties,” Mr. Bentley said. “These properties tend to sell at a 35-per-cent discount relative to non-distressed sales.”

In the fourth quarter, prices in the U.S. fell 2.1 per cent, following a 3.3-per-cent drop in the third quarter. That, Mr. Dales in a separate report, left prices 0.7 per cent below the previous floor, meaning the dip in the last half of the year “wiped out” the gain of 4.9 per cent in the previous six quarters. Prices, he lamented, are now at the same level as they were in 2002.

Prices are falling again because of a temporary drop after the expiry of a tax credit last April, and the pace of decline is slowing. Better news?

“The fact that prices were still falling eight months after the tax credit expired suggests that prices are now being depressed by the continued imbalance between low demand and high supply,” he said, adding he believes that there are some 850,000 too many properties for sale, with 4.5 million more in the pipeline from foreclosures.

“The fact that housing has never before been as under-valued against income limits how much further prices will fall,” Mr. Dales said. “... The bulk of the price falls are clearly behind us. But history shows that prices can still fall when housing is under-valued.”

Some, such as Ian Shepherdson of High Frequency Economics, see an end in sight. The chief U.S. economist for the group pointed out that the pace of decline was cut in half in the past two months, compared to the previous two, and he believes prices will stabilize, and maybe even rise, in the next few.

“Prices respond to movements in home sales volumes in the short-term, which is why they tanked in the fall after the summer collapse in sales, following the expiration of the homebuyer tax credit,” he said. “With volumes having rebounded in the past few months, prices will soon follow suit.”

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