House prices tumble 18.5 percent in 2008

The drop in house price set a new record in 2008, falling 18.5 percent from December 2007 to December 2008, according to S&P's Case-Shiller home price index. That's slightly more than the 18.2 percent economists expected. The three hardest hit cities were Phoenix (down 33.9 percent), Las Vegas (down 32.9 percent) and San Francisco (down 31.2 percent).

Things get even worse if you look at the drop in prices since December 2006. The 20 city composite index is down 25.9 percent. The hardest hit cities since December 2006 include Phoenix (down 44 percent), Miami (down 41.3 percent) and Las Vegas (down 43.3 percent). These cities may be nearing the bottom, since economists have estimated that housing prices need to fall about 50 percent to get back to what is considered pre-bubble pricing. But markets do tend to over-correct, so there may still be some downside in these areas.

President Obama hopes to stem foreclosures and stabilize house prices with his plans to assist homeowners with refinancing and loan modifications. How will this help? Right now, foreclosure sales dominate the market in many cities, pushing down prices. Even if one's home is not in or nearing foreclosure, one must compete with these bargain basement prices. Until this backlog of foreclosure homes is sold, housing prices cannot stabilize.

This downward spiral of home prices also impacts the household wealth and the consumers propensity to spend. For years 70 percent of the economy was driven by consumer spending. Something needs to replace that spending before an economic recovery will be possible, which means people need to get back to work. Homebuyers need to feel confident that the home they buy today won't be worth less a month after closing.

The Case-Shiller index has fallen every month since January 2007 as the housing crisis grew into a nationwide crisis. Few cities have escaped the fall. For example, Charlotte, North Carolina continued to see rising house prices until November 2007, but prices in that city started to fall in December 2007. Homes in that city have dropped 7.7 percent since November 2007. Others that started showing weakness in November 2007, but whose housing prices haven't dropped as dramatically include Cleveland (down 7.1 percent) and Dallas (down 5.5 percent).

Clearly the bubble burst is taking in more and more cities and towns. While some believe we need to let market forces do their damage. Others believe that without some significant action to stem foreclosures, the carnage will continue to worsen and cause even more hardship to those who did everything right by buying what they could afford and making payments on time.

Lita Epstein has written more than 25 books including "The 250 Questions You Should Ask About Buying Foreclosures."

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