Housing prices haven't hit bottom yet

WASHINGTON — The Bush administration's pledge to rescue ailing housing finance giants Fannie Mae and Freddie Mac raises anew questions about just when the nation's dismal housing market will hit bottom.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have suggested over the past year that an end is in sight. But with each prediction, things have grown worse. For many homeowners, the deep housing slump feels like a drop off a skyscraper. Every time another 15 floors have passed, there seems to be more room to fall.

"I don't think we get strengthening in the housing market until late 2011 or 2012," said Mark Vitner, senior economist for Wachovia, the nation's fourth largest bank and one that this month hired the number-two man from the Treasury Department as its new chief executive officer to shore up its own growing exposure to mortgage debt.

Before bottoming out, prices nationwide should fall 22 percent to 29 percent on average from their peak, according to a report that Wachovia released last Monday.

"I think we're somewhere between halfway and two-thirds of the way through the correction," said Vitner, who closely studies the trends in home prices and home sales nationwide.

Other analysts are only slightly more optimistic.

"My view is that we are two-thirds through the housing downturn, at least as measured by house price declines. The price declines began in late spring 2006 and will more or less come to an end in late spring 2009," said Mark Zandi, chief economist for Moody's, a forecaster in West Chester, Pa. "The Fannie-Freddie debacle may push this out into the summer or even fall of 2009."

Paulson announced a series of measures last Sunday that were designed to assure investors that the federal government would do whatever it took to ensure the solvency of Fannie and Freddie, the two government-chartered, shareholder-owned institutions that are vital to the nation's housing market.

By buying or guaranteeing mortgages from commercial lenders, Fannie Mae and Freddie Mac allow lenders to get the loans off their books, thus freeing up more money for lending to home buyers.

In theory, Fannie and Freddie back only the safest of loans. But investors have shown themselves to be increasingly worried that the housing market might sour so much that even those loans will go bad and Fannie Mae and Freddie Mac won't have enough cash in reserve to cover them. That's why the prices of Fannie and Freddie shares have dropped by more than 80 percent over the past year.

.Analysts say there's no evidence that so-called prime loans are in danger, despite the housing downturn.

"Prime loans are not the problem. They've actually held pretty stable considering how turbulent the market around them has been," said Rick Sharga, vice president of RealtyTrac, a large online foreclosure-listing service in Irvine, Calif., that publishes some of the most-cited nationwide foreclosure statistics.

Sharga thinks that even if prices continue to decline it's unlikely that prime loans will go the way of so-called sub-prime loans, which are defaulting at record rates.

"I don't think you are looking at a savings and loan (crisis scenario), where otherwise good-standing homeowners are losing their houses because they are worth considerably less than the mortgages," he said. "I don't see the market going that far down."

As unlikely as that scenario might be, it's not impossible, however.

If the economic slowdown deepens considerably and job losses mount beyond the 30,000 to 60,000 a month that now are being reported, "all bets are off," Sharga said.

"If the economy tanks, we could be looking at a whole different scenario," he said. "We could be having a much different conversation nine months from now, but this kind of depends on all things going wrong at once."

Zandi, of Moody's, said that restoring the health of the financial sector so that it could make mortgage loans once again was crucial. Without it, his forecast of housing price-declines bottoming out next year "will prove too bright."

How low can they go? Some economists think that a close approximation may be determined by comparing home prices with the nation's rate of per-person income, called per capita income.

In the report last Monday on home prices, Wachovia's Vitner noted that the median sales price for a home — the point where half of homes cost more and half cost less — historically is about 6.19 times the national per-person income.

At the peak of the housing boom, October 2005, this ratio leapt to an all-time high of 7.34. In May, the last month for which data were available, the ratio was down to 5.74, slightly above an all-time low.

That would suggest that the median home price, which lost about 11 percent between October 2005 and the most recent reading, is nearing its bottom. It was $203,643 in May, down from $228,733 in October 2005.

But Vitner thinks it still has a way to go. Because the boom price was much higher than income figures would have suggested, the bottom is likely to be much lower. That means that the bottom median price is likely to be around $189,000, he wrote.

And historical trends no longer may be a valid basis for judging a market that's undergoing an unprecedented decline.

Until the current downturn, median home prices had declined more than two months in a row only once, in 1990. But the decline now has lasted 22 straight months.

The Wachovia report:

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