US house prices declined 0.6% on a seasonally adjusted basis from December to January, according to the Federal Housing Finance Agency (FHFA) monthly house price index. The results come with a warning that the much-feared double-dip in housing prices may be already here. January’s drop comes after a 2% decline in December, adjusted from an originally projected 1.6%. As illustrated in the chart above, after peaking in April 2007, home prices are now at the same level as prices in October 2004 level. Since the peak, prices continue to decline, albeit with some upward ticks. Paul Dales, the US economist at the Toronto office of Capital Economics, said recent increases in excess supply are already weighing on prices and the US housing market is in a double dip, both in activity and prices. While the FHFA index can be volatile from one month to the next, it is a big cause for concern. “[A] double dip in prices has already begun, and in the space of just two months, it has more than reversed the increases of the previous year,” Dales wrote. “We first predicted a double dip in house prices at the start of February, but even we didn’t think it would come this soon.” The February decline in existing home sales is another sign of a reversal in previous gains stimulated by the homebuyer tax credit. There are few signs of a sustainable housing recovery and more signs of stress, Dales wrote. Mortgage applications remain weak, despite record low mortgage rates and home inventory rose to an 8.6-month supply. Anything above a 7.5-month supply is consistent with falling prices. Dales estimates another 5m to 6m homes will be foreclosed on, pushing the excess supply up to 21 months. So while in the near-term, housing activity is likely to increase ahead of the expiration of the homebuyer tax credit, such gains will be temporary. “The housing market may remain a noose around the neck of the US economy for some time yet,” Dales said. The FHFA index is calculated using purchase prices of houses backing mortgages sold to or guaranteed by Fannie Mae (FNM) or Freddie Mac (FRE). For the 12 months ending in January, US prices fell 3.3% and are 13.2% below its April 2007 peak. Regionally, prices were up 2% in the Mountain and 0.4% in the West North Central US Census divisions. Prices were flat in the Pacific division. The biggest price decline was the 1.8% drop in the East North Central division, followed by declines of 1.2% in the New England and South Atlantic divisions. The East South Central (0.7%), Middle Atlantic (0.6%) and West South Central (0.1%) divisions also experienced declines. Write to Austin Kilgore. The author held no relevant investments.

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