Case Shiller Composite, Year over Year (Calculated Risk)

The deep investment in the notion of a housing recovery took another hit today, as home prices fell to a 10-year low.

The housing market started the new year with a thud. Home prices dropped for the fifth consecutive month in January, reaching their lowest point since the end of 2002.

The average home sold in that month lost 0.8% of its value, compared with a month earlier, and prices were down 3.8% from 12 months earlier, according to the S&P/Case-Shiller home price index of 20 major markets.

Home prices have fallen a whopping 34.4% from the peak set in July 2006.

It’s actually a bit worse than this, real home prices and price-to-rent ratios are down to late 1990s levels.

The reaction from those with that deep investment is to say that prices aren’t coming back to the bubble years, nor should they. And that’s true. But the notable part of all this is the trend. You have new and existing home sales falling month-over-month, and now prices falling as well. And what we know is that the coming months will probably lead to a spike in foreclosures and a new set of inventory dumped onto the market. In fact, we’re already seeing this. It’s a result of the foreclosure fraud settlement, and the very reasonable belief from the banks that they will never face sanction for their misdeeds. The principal reduction piece attached to the settlement is so trivial that JPMorgan Chase reps in Florida don’t even know about it.

The other point is that, when you have 20% of all mortgages in negative equity, continuing price collapse restarts that vicious cycle. It draws people more underwater and more vulnerable to sudden economic shocks in their personal financial picture. The principal reduction from the settlement is too minor to help, HARP 2.0 is setting up as a disaster, Fannie and Freddie haven’t moved on write-downs, and basically all the efforts to stabilize the foreclosure crisis have fallen short. So that, coupled with the expected surge, increases foreclosures. Foreclosure sales start to make up a larger portion of the market, and sellers must set their price accordingly. This lowers prices overall, and the negative equity increases. Eventually people either cash out or they succumb to being underwater, leading to more foreclosures. Leading to lower prices. Leading to more negative equity.

If there were a finite set of homes that needed to “clear” to reset the market, that would be one thing. But [we don't know what that number is, yet.]. Each drop in home value has a significant impact on those at or near negative equity. And you’re talking about millions of families.