Record Home Price Drops May Signal Housing Market Bottom

This article was last updated on May 5

Despite median home prices across the nation falling by 14 percent to $169,000, there are emerging signs that the housing market may be stabilizing and reaching a bottom. For new or would-be homeowners, mortgage rates below 5% and all the stimulus tax incentives have made buying a house much more affordable and attractive. And many of them have acted, with inventory of previously owned homes on the market dropping to 3.7 million in March from 3.8 million a month earlier, according to National Association of Retailers (NAR) data. The number of new homes for sale fell to 311,000, the lowest since January 2002, according to the Commerce Department.

As more people enter the housing market and inventories fall, home prices will eventually start rising providing much needed relief for current homeowners who bought in the last few years, with many owing more on their property than it is worth. In fact sales in the most distressed markets are now shooting up as prices fall, Nevada was up 117 percent; followed by California which rose 81 percent; Arizona up 50 percent; and Florida with a 25 percent increase. There are also signs that home price declines are slowing, with the latest home price falls lower than the first few months of the year.

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“I do think we have some early signs that the market overall is stabilizing,” Housing and Urban Development Secretary Shaun Donovan said today in a speech at an NAR conference in Washington. “Since January we’ve seen both home sales moving up and down around a relatively stable number and we are seeing the first signs that the rapid decline in home prices is starting to abate.” Donovan said the government will allow first-time homebuyers to use the $8,000 tax credit approved by Congress in February (see all the details) as a down payment on mortgages guaranteed by the Federal Housing Administration.

With the overall economy and stock markets showing signs of revival, people are getting more confident about future prospects that in turn should drive housing markets to the upside. News reports highlighting sharp home price drops are skewed because they focus on foreclosure and short sales, whereas the fall in prices for traditional homes has been far less widespread. In fact if you bought your home more than 10 years ago, chances are you still have a lot of equity in your home.

No doubt it will take a few years for all the excess inventory to clear and it’s unlikely 20% plus annual home price rises experienced earlier this decade will return, but eventually a house will once again become an asset rather than a liability.

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