Price Declines Put New Originations at Risk

Home prices declined at a record pace in the third quarter, according to the S&P/Case-Shiller Home Price Index, and that is fueling concern that home loans originated this year could soon be under water. S&P/Case-Shiller reported that home prices nationally were down 16.6% in the third quarter from a year earlier. That was higher than the rate of decline posted in the first and second quarters. That puts prices back to where they were in 2004, down 21% from their peak on a national average basis, with the largest declines being posted in once-hot Sun Belt markets, including Phoenix, Las Vegas, Miami, San Francisco, Los Angeles and San Diego. Moreover, the index shows that prices declined on a month-to-month basis in September across all metropolitan areas covered by the index. And with unemployment - a key default driver - still rising, further price declines could leave many borrowers who took out home loans this year and next at risk of owing more money than their home is worth, economist Karl Case, a professor at Wellesley College and founding partner of the index said during a conference call. "If prices keep dropping, 2008 and 2009 mortgages could be bad news. If prices continue to fall substantially next year, then that book is going to be underwater too, and that's going to be very devastating to the economy," Mr. Case said. Separately, the Federal Housing Finance Agency also reported that home prices declined in the third quarter. FHFA's index estimates that home prices declined 1.8% in the third quarter from second quarter. But over the past year, the FHFA index shows prices down just 6%, considerably less than the Case-Shiller data indicates.