Watch Out! Home Prices Are Headed Even Lower

Although the decline in existing-home sales reported today was less than expected, the swelling backlog of unsold homes—which grew from a 10-to-11.2-month supply—means more pain is in store for the already-downtrodden housing market.

The National Association of Realtors' existing-home sales report for April, released Friday, showed that sales fell 1 percent—slightly above consensus estimates—from March and are now down nearly 18 percent from last year's levels. At the same time, total housing inventory climbed nearly 11 percent. Median existing-home prices are now 8 percent below April 2007 levels.

"Looking ahead, the most important part of this month's report is the increase in unsold homes on the market, to a very high 11.2 months' supply," Bill Hampel, the chief economist for the Credit Union National Association and Affiliates, said in an E-mail message. "Further price reductions will be necessary to move the excess inventory."

Patrick Newport, U.S. economist at Global Insight, says the market for existing homes is now facing three distinct head winds: tight credit, an economy losing jobs, and the accelerated pace of home-price declines. "On top of this, consumer sentiment is at recessionary levels, and gasoline prices are at record highs," he said in a report issued Friday. "All of this adds up to a dismal house-selling season."

He predicts median prices will fall an additional 8 to 10 percent before turning around sometime next year.

As for the sales outlook (emphasis is mine):

Existing home sales are falling, but at slower rate than in 2007. Sales were down 17.5% from a year earlier, but have fallen only 3.4% in the past six months. Indeed, in the West, sales have risen 11% since hitting bottom in October 2007. Might sales be nearing bottom? Our view is that with demand weak and credit tight, sales will fall another 10% before turning around late this year.