Why are home prices still falling?

This post comes from Marilyn Lewis of MSN Money.

The closely watched Standard & Poor's/Case-Shiller Home Price Index is out: It shows home prices are still dropping.

Overall, real estate values fell 1% between October and November, The New York Times says. According to the S&P survey, prices are just 3.3% above the low reached in April 2009. They've fallen 1.6% from the same time a year ago.

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Prices fell from October in 19 of the 20 metro areas watched by S&P. And, compared with the year before, just four of the 20 cities studied saw prices grow: Los Angeles, San Diego, San Francisco and Washington, D.C. In eight of the cities studied, prices fell to new lows: Atlanta; Charlotte, N.C.; Portland, Ore.; Seattle; Tampa and Miami.

"Home prices in the 30 metropolitan cities remained at about 3.0% below the levels attained a year ago," says a separate analysis by FNC, which makes software used by banks to manage their real estate holdings. Nineteen of 30 cities tracked by the FNC 30-MSA Composite Index saw prices fall an average of 1.8% from October to November.

The worst horror stories from the S&P report, as reported by Forbes, were:

• Las Vegas-area prices have fallen 57.2% since peaking in August 2006.
• Phoenix prices are 53.9% below June 2006 highs.
• Miami prices have fallen 48.6% since December 2006.

Where's this headed?

To understand where this is going, let's break the question down. There really are two questions:

• Will prices keep dropping or is this the bottom?
• If this is the bottom, when is the ride back up going to begin?

Each forecaster takes the same data and describes it a little differently:

• Based on today's report, The New York Times is calling it a "double-dip" housing recession, which makes it sound kind of grim and endless.
• Forbes also likes the "double-dip" descriptor, predicting a double-dip housing recession before spring. (What's a "double dip"? It's if the S&P price index were to hit new lows in both its 10-city and 20-city surveys. Hasn't happened yet, but the S&P price indexes have been dropping for six months straight.)
• S&P/Case-Shiller report founder Karl Case gives it a slightly more optimistic spin: He told Bloomberg that prices could start back up by spring if jobs cooperate.

Bloomberg reports:

"Prices have gone flat, bouncing around at what I think is essentially a bottom," Case, a retired professor of economics at Wellesley College, said in a radio interview today on "Bloomberg Surveillance." "We're really going to have to wait to see what the spring market brings."

In a separate Bloomberg article, Case said:

"There's a good chance of a housing turnaround this year, but it's not going to be enough to give much help to the economy. … We're coming off 50-year lows and we still have to deal with the foreclosure mess."

Last year this time, home prices were looking good. Weak yes, but rising. They'd bottomed (or so it seemed) -- in April 2009. They rose nicely after federal homebuyer tax credits between fall 2009 and late spring 2010. They kept rising until July.

And then, boom, they fell, and kept falling -- in some cases even lower than before. Post continues after video.

However, all's not dark. There are signs of gathering strength, however modest:

• Home construction is showing "stronger activity going forward," reports Hanley Wood's Market Intelligence report for builders.
• Sales of existing homes grew, for the second straight month, Market Intelligence said. Sales were up 12.3% in December. But because they'd dropped badly in 2010, the numbers still were less than at the same time the year before.
• The Leading Economic Indicator Index has risen for six months straight, surprising analysts in December by hitting 112.40, a 1.10 point monthly increase, reports Bloomberg.
• The Consumer Confidence Index, also out today, rose to 60.6, up from 53.3 in December.
• Bloomberg reports that the unemployment rate dropped to 9.4% in December after hitting a seven-month high of 9.8% in November.

And, now that mortgage rates are rising, you'd expect fence-sitters to buy while money is cheap. But will they buy in numbers large enough to pull up prices?

The dark tunnel

"The enormous supply overhang of existing homes (particularly factoring in all those in foreclosure or soon to be) promises to keep pressure on prices for some time," Joshua Shapiro, chief U.S. economist of MFR Inc., told the Times.

And that's the issue: The huge glut of foreclosure properties -- homes now in the hands of banks and other homes soon to be in the hands of banks. Not just are there a lot of homes on the market now, but many more are coming. Buyers -- lots and lots of them -- must chew through this mammoth "inventory overhang" before prices will rise.

As analysts at Radar Logic explain in their (subscription) newsletter:

If housing demand increases because of improvements in the employment and other sectors of the economy, financial institutions will respond by putting more of the homes in their inventories on the market, and home prices will remain depressed.

On top of that, there's an uncounted but presumably huge group of homeowners who would put their homes on the market right now but are holding off until prices improve. So, given a little price recovery, you can count on this pent-up supply to be added to the market, further stringing out the housing recovery.

Prices won't rise until buyers have fewer homes to choose from and they are forced to compete with each other to get a home they want.

"Everything in this report is unfortunately still sagging and still pointing downward. … We still seem to be at best scraping along the bottom," David Blitzer, S&P Index Committee chairman, told CNBC. Prices could fall three or four more percentage points, nationally, in the next month or two, Blitzer added.

The light at the end

Radar Logic, whose economist Nouriel Roubini was nearly alone in predicting the 2007 housing crash, tells newsletter readers to expect home values to keep falling until spring. After that, it'll take time before they start rising again. The newsletter says:

Given the current supply of homes for sale, the enormous shadow inventory of homes in bank inventories plus mortgages in default and foreclosure, and the millions of at-risk homeowners with negative equity in their homes, we do not expect home prices to increase on a sustained year-over-year basis until 2012.

More from MSN Money:

• 'Shadow' backlog of foreclosures could thwart recovery
• Is it safe to buy a foreclosure?
• Can you trust your mortgage lender?
• Could Grandma lose her house?
• Which is better: Renting or buying a home?
• 5 states where housing will rebound