Home Prices Down 6.1% from 2007 Levels and Why They Probably Have Further to Go

The latest data from the National Association of Realtors paints an interesting picture.  According to the data, home sales have declined 46% since their peak in 2005, falling from 7,076,000 units to a seasonally adjusted annualized rate of 4,860,000 in 2008.  The average of national home prices have fallen only 2% from $219,600 in 2005 to $215,100 today.  That fall has accelerated in the past year though, with home prices down 6.1% from 2007 levels.  While sales peaked in 2005, prices peaked in 2006.

The rise in prices continued even after sales had peaked and so we might expect that the same will happen with sales and prices going down.  To date, we don't seem to have reached a bottom in sales.  The months supply of unsold homes (how many months it will take to get through current supply of unsold homes at current sales rate) is up from 4.5 months supply in 2005 to 11.1 months based on the June 2008 data.  The chart below shows that home inventories of existing unsold homes have risen steadily since 2005.

What does this mean?  Probably that either housing prices have to fall further or mortgage rates must come down significantly to spur demand and affordability to work off the excess supply of houses.  Since it doesn't look like mortgage rates are going down, home prices are unfortunately going to have to fall further.