As Home Prices Drop, 'Serious Reasons To Worry' About Economy (VIDEO)

As Home Prices Drop, Economy Has 'Serious Reasons To Worry'

Home prices have dropped across America more than expected, in a slide that has led some experts to predict that housing is headed for a double-dip.

Yet despite a glut of homes lingering in foreclosure proceedings, analysts say that a recovery in the housing market will, in large part, depend on an overall economic recovery.

Data released this week from the Standard & Poors/Case-Shiller index across 20 major U.S. cities fell 1.3% in October from September, the third straight national decline.

Six cities -- Atlanta, Miami, Seattle, Tampa, Charlotte, North Carolina, and Portland, Oregon -- have hit new lows since the housing market began to struggle in 2006 and 2007. Atlanta showed the steepest decline, with prices falling 2.9 percent from the prior month.

"If home prices continue on this pace down, I think the economy has serious reasons to worry," Yale economist Robert J. Shiller -- and co-creator of the Case-Shiller Index -- told the Wall Street Journal in a recent interview. (SCROLL DOWN FOR VIDEO.)

Bad news in the housing market could ripple through to consumer spending, which has recently shown heartening gains this holiday season. Consumer spending makes up about 70 percent of the economy.

"Our concern on the double-dip is the consumer and the fate of the consumer," said Allen Sinai, chief economist at Decision Economics, Inc. "I think the lack of stable prices is a negative consumer fundamental for spending."

With unemployment mired at 9.8 percent, the housing market is hinged upon the job market. "The economy has to recover for the housing market to recover, not the other way around," said Patrick Newport, an economist with IHS Global Insight.

Homes remain a major part of many Americans' wealth -- households held $6.4 trillion of home equity at the end of the third quarter, according to a Federal Reserve report.

"It's unfortunate because a lot of families have all their wealth in their house, all their savings," said Sinai. "Household spending in general is hurt. There's a restraint on consumer spending."

The latest data has led some to predict that home prices are headed for a double-dip.

"The double-dip is almost here [...] There is no good news in October's report,"
David M. Blitzer, the Chairman of the Index Committee at S&P said in a press release. "Home prices across the country continue to fall. The trends we have seen over the past few months have not changed."

A broad housing market decline, many experts say, could continue through 2011.

"We expect house prices to decline again slightly in 2011. We're projecting ultimately they'll bottom in the third quarter of next year" said Alex Miron, an associate economist at Moody's Analytics. "We're expecting peak-to-trough decline of more than 30 percent."

But not everyone believes that a housing double-dip is inevitable. The 2010 numbers look particularly grim because of the expiration of the first-time home buyer credit in April, according to Stuart Hoffman, chief economist at PNC.

"I think the bottom line is, the drop in the past couple of months is comparing [numbers] to a year ago, exaggerated by the supposed expiration of house credit, and the actual expiration," said Hoffman.

The drop in home prices was accompanied by an increase in the number of foreclosures in the third quarter. Newly initiated foreclosures went up to 382,000 in the third quarter, at 31.2 percent spike from the second quarter, according to a report by the Office of of the Comptroller of the Currency and the Office of Thrift Supervision.

As a mass of foreclosed homes hits the market, home prices are likely to languish.

"Until the market works through those [homes], the house prices are going to be flat [or] down," said Miron. He pointed to the growing number of homes that are owned by a lender, but have gone through the default process and have failed to sell at auction.

"These are the homes that are most likely to be sold at bargain basement prices," he said. "There are almost 1 million, and the number has been rising for the past three years."

WATCH Robert Shiller's interview with the WSJ below:

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