Home Prices Falling at Accelerating Rate, Putting Households in 'Debt House Arrest'

February 27, 2008--Sales of new single-family homes dropped 2.8% in January compared to December, hitting the lowest annual rate in nearly 13 years, at 588,000. New and existing home sales combined have plunged to a rate of 5.5 million per year, a level characteristic of the 1970s.

The median sales price of a new home fell to $216,000, down 15.1% from a year ago, and down a whopping 33.9% from January 2007, according to the Commerce Department. This represented the biggest annual price drop since records began in 1963. The unsold inventory of new homes climbed to a 9.9-months supply at the current sales pace, the highest level since October 1981.

Yesterday, the S&P/Case-Shiller national home-price index for the fourth quarter showed a 9.1% plunge from a year earlier, the largest decline since the index started 20 years ago. The accelerating drop in home prices means that at already at the end of 2007, nearly 9 million homeowners have negative equity; that is, they owe more on their mortgage loan than the home is worth.

Households in that situation are effectively in "debt house arrest," trapped in homes on which they are in absolute debt, and unable to sell or move without being liable for tens of thousands of dollars in immediate cash debt payments. They are set up for a looming foreclosure. Housing economists estimate that when the house price plunge reaches 20% year-to-year nationwide (as it already has in parts of California, Florida, Virginia and elsewhere), some 15 million of America's roughly 57 million mortgaged homes will be in this negative-equity trap.