How to Handle Those House-Price Declines

It seems that analysts who last year were forecasting double-digit declines for 2008 were right on the money -- and there are ways to deal with it whether you're looking to sell or buy a home.

"Home prices are forecast to drop in the overwhelming majority of markets in all 50 states," predicted HousingPredictor.com analysts in November.

In December, Moody's(MCO Quote) Economy.com predicted that many metro areas would record losses of 20% or more in 2008 during this downturn. Its analysts expected the national median price for single-family homes to drop 13% through early 2009, but putting the actual price decline well over 15% once sellers' discounts were considered.

Numbers released Tuesday by Standard & Poor's(MHP Quote) Case-Shiller Home Price Index show that the 10-City Composite set another new record, with an annual decline of 11.4%. The 20-City Composite recorded an annual decline of 10.7%, with 19 of the 20 metro areas tracked reporting declines -- and 10 of those reporting double-digit declines.

"No markets seem to be completely immune from the housing crisis," says David M. Blitzer, chairman of the index committee at Standard & Poor's.

Looking deeper into the data, 16 of the metro areas are also reporting record-low annual growth rates. The monthly data show that every one of the MSAs has now declined every month since September 2007, marking five consecutive months. On top of that, the declines have increased through time, in general, as 13 of the 20 MSAs reported their single largest monthly decline in January.

"Unfortunately, it does not look like early 2008 is marking any turnaround in the housing market, after the declining year recorded throughout 2007," says Blitzer.

So, if 2008 is not the comeback year homeowners were hoping for, what is it?

Call it the "Year of Adjustment."

Given homes prices had gotten so inflated, say experts, mortgage companies got out of hand with creative financing to help buyers afford homes, existing homeowners got cocky as neighborhood values soared and risked taking out more equity than they could chew, while most didn't stop to think that double-digit price increases could only cause the bubble to burst.

Neil Garfinkel, a real estate lawyer with Abrams Garfinkel Margolis Bergson in Melville, N.Y., says home prices were increasing so rapidly a few years ago that it was typical to see appraisal values come back at or above the contract price.

Things are different today.

"A client is selling a property [it is in contract]. The appraisal came back today and it was $40,000 less than the contract price. The house is very likely worth more than the appraised value. This is a good example of how numerous forces are working on the real estate market. This house would have appraised out one year ago. We have now moved to the other extreme in the marketplace, where the house most likely is worth more than it will be sold for -- or may not be sold right now."