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How far will US housing prices fall in 2009?

(Agencies)
Updated: 2009-01-31 10:57

The year 2008 was horrible for real estate and, according to some experts, 2009 could be worse. Speaking at the World Economic Forum in Davos on Jan. 29, prominent housing economist Ken Rosen suggested home prices could drop an additional 6% to 7% this year.

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Rosen, a professor at the University of California at Berkeley, told the Associated Press that the decline in housing prices is only about three-quarters complete, and the cumulative slump could reach 24% this year.

To offset such a plunge, Rosen is proposing a foreclosure moratorium to help stabilize the economy. He said as many as 8 million homes could go into foreclosure in the next three years without government action, the AP reported. "I worry about the cumulative decline of all the job losses leading to a second wave of foreclosures. So we have to stop this downward spiral," Rosen said.

New Home Sales

Home prices are tumbling across the country, but sales of existing homes rose a surprising 6.5% in December as investors and other bargain hunters took advantage of falling prices, the National Association of Realtors said early this week.

But sales of new homes dropped 14.7% in December to the lowest level on record, the US Commerce Dept. reported on Jan. 29. The sign of the bottom, said Rosen, will be when housing price declines slow from 1% to 2% a month to half a percent.

Other experts agreed that government action is necessary to bring about a recovery or at least to lessen the severity of the crisis.

The government should target mortgage interest-rate buydowns and other foreclosure reduction programs to the worst-hit markets, said Dean Baker, co-founder of the Center for Economic & Policy Research in Washington, D.C., who warned of a potential housing crash years ago.

Baker -- whose new book, Plunder and Blunder: The Rise and Fall of the Bubble Economy, was published this month -- says a recovery is unlikely in 2009, and markets could see house prices drop below even their pre-bubble levels.

Tide of Foreclosures

The US unemployment rate climbed to 7.2% last month after a flood of end-of-year layoffs. Some 2.6 million jobs were lost in the US in 2008, largely in the last quarter. And companies this month have announced thousands of fresh cuts.

"All the evidence is showing prices dropping at a more rapid rate," Baker said. "It's not a good time for people to buy houses when they're losing jobs at this rate."

Housingpredictor.com, an online real estate forecasting company, said prices nationwide will fall 12% in 2009, after sliding 11.1% in 2008. Mike Colpitts, editor of Housingpredictor.com, said the big story of 2009 could be the tide of foreclosures caused by the recasting of millions of so-called pay option adjustable-rate mortgages, which give borrowers the choice of making minimum payments that don't even cover the accrued interest. The option ARMs were especially popular in California, Florida, and Nevada.

Many other economists, meanwhile, are reluctant to make predictions of any sort. Brian Bethune, US economist for IHS Global Insight in Lexington, Mass., said housing forecasts are pointless these days because so much is unknown, especially about the federal government's housing measures.

"We're in uncharted territory," he said. "We can start polling people, and they'll start throwing out numbers. At this point, it's just confusing the public. Quite frankly, a lot of this is unknown. Once the pieces of jigsaw puzzle come together, then we can make a reasonable prediction."