Real Estate

Home prices take steeper downturn

Third-quarter home prices dropped 1.7% from prior quarter, largest drop in 21-year history - S&P Case/Shiller.

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By Les Christie, staff writer

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NEW YORK ( -- Home prices have fallen steadily since July 2006, but plunged even more steeply in the third quarter, according to a report released Tuesday by S&P Case/Shiller.

According to the Case/Shiller index, which covers 20 local markets and a national average, third-quarter home prices dropped 1.7 percent from the second quarter.

The housing market could possibly get a lot worse, according to Yale economist and index co-founder, Robert Shiller. He was asked at a press conference following the release of the latest index data whether housing price increases, which had far outstripped income gains, could revert back to more normal ratios.

Shiller said, "You're talking about [home-price] declines of 50 percent, in real terms. That's not out of the question."

Referring to the latest declines, Shiller said they were notable for two reasons. "First, the third quarter decline, at 1.7%, was the largest quarterly decline in the index's 21-year history. And, second, the year-over-year decline posted its second consecutive record low at minus 4.5%."

The index, which many experts consider the most accurate snapshot of home price trends, revealed that prices peaked in the summer of 2006 and have fallen 5 percent since then.

Home price growth started to slow in November 2005 and turned negative in August 2006.

Of the 20 markets covered, 15 showed negative returns and all 20 had negative returns for September, compared with a month earlier.

Worst hit was Tampa, Fla., where prices fell 11.1 percent compared with a year earlier. The second biggest loss was in Miami, where prices fell 10 percent from a year earlier.

Charlotte, N.C. and Seattle showed the highest year-to-year gain of 4.7 percent each. But Charlotte declined 0.6 percent in September and Seattle prices fell 0.2 percent.

The housing cycle is very important to the business cycle, according to Shiller. Most economic recessions are preceded by housing declines and residential construction is an important leading indicator for the economy. The weakness in the housing market is causing him to wonder whether the nation could slip into recession.

Shiller conceded that most economists are still optimistic; employment is strong, consumer spending robust and the weaker dollar has increased exports. But, there's a big question in his mind whether subprime problems will lead to a retrenchment in consumer demand.

According to Shiller, the current situation is unprecedented - there's never had been a housing boom quite like the one that ended last year - and how we come out of the bust is anyone's guess.

"We are in the aftermath of the biggest housing boom in history," he said, "and, even though a lot of peoples' models don't reflect [the problems], I think there's a significant chance of recession, over 50 percent." To top of page

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