Home prices set to slide in '08

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NEW YORK (CNNMoney.com) -- In a fresh sign that the nation's housing crisis will worsen, home prices are likely to decline in 2008 for the second straight year, the National Association of Realtors said Thursday.

The Realtors, in its monthly economic and sales outlook, is forecasting a 1.2% drop in prices of existing homes sold this year.

Only a month ago, the association was forecasting that prices would be flat in 2008 and that the home market would rebound in the last half of the year.

The group was forecasting that the first quarter would see a record 5.3% drop from year ago levels. Now it's expecting the current quarter to see even a larger decline in prices of 6.1%.

Last year, when the median price slipped 1.4 from 2006 levels, was the first on record that the Realtors recorded full-year decline in existing home prices.

The group is also forecasting a 4.8% decline in the number of existing homes sold this year. A month ago it was still forecasting a 0.9% pickup in the sales. Existing home sales plunged 12.8% in 2007, according to the group's figures.

"We're seeing a pattern that is consistent with skimming along the bottom of the cycle, and sales could ease modestly," said Lawrence Yun, the group's chief economist, in a statement.

The Realtors forecast further decline in sales and prices even though it projects the overall U.S. economy will stay out of recession. It expects gross domestic product, the broad measure of the nation's economic activity, to show 1.2% growth in the first quarter and 2.2% growth in the second quarter.

But a growing number of economists are forecasting that the economy has already entered into a recession and is like to see GDP in negative territory for at least the first half of the year.

In the year ahead, the Realtor's see even greater weakness in new home sales - a 4.3% drop in median prices and a 17.7% plunge in the number of sales.

The Realtors have been recently lowering their price and sales forecasts with each monthly update. The group still has a more bullish view of the market than other outside forecasts. For example, investment firm Merrill Lynch (MER, Fortune 500) is forecasting a 15% drop in home values this year, and an additional 10% decline in 2009. The Realtors are forecasting a 3.2% rebound in prices next year in this latest reading.

Christian Menegatti, lead analyst for online economic research firm RGE Monitor, is forecasting a much sharper drop in home prices in 2008 and beyond, probably double digit.

"What we've seen so far are still mild declines," Menegatti said. "I think we'll see much sharper declines through this year and the next. I don't think we are even close to a bottom yet."

Pending home sales fall again

Menegatti points to the Realtors' Pending Home Sales Index for December, which was also released Thursday. That index showed that the number of homes under contract fell once again to the second-lowest level on record - indicating growing weakness on the demand side, which Menegatti said will keep the inventories of homes for sale at record levels.

"Our inventories are still very very high and they need to be worked off before we get to bottom," he said.

The Pending Home Sales Index fell 1.5% to 85.9. That was better than only the record low of 85.5 set in August, when the meltdown in the mortgage finance market made it difficult for many buyers to arrange financing.

While the index posted a modest rebound in September and October, it has fallen each month since then. The four weakest readings on record have come in the last five months of 2007. Before that downturn, the previous record low had been 89.8 reached in September 2001, the period in which the terrorist attack shook buyer confidence.

The pending home sales index is more forward looking than the group's more widely followed reading on existing home sales, which tracks closings. A home is generally under contract for a month or two before closing.

The Pending Home Sales Index is only seven years old, and a 100 reading represents the level of homes under contract in 2001, the first year of the index. The December report brought the index' annual reading in at 96.3, the first time the annual number has fallen under 100.