Home price declines could make matters worse

By Joanne Morrison - Analysis

WASHINGTON (Reuters) - A decline in U.S. home prices is needed to attract buyers back and end the housing slump, but with no bottom in sight, more trouble lies ahead for an economy that may already be in recession.

This is a growing concern among Wall Street analysts and policy-makers, like Federal Reserve Governor Frederic Mishkin, that potential home buyers may wait on the sidelines for an extended period.

"If house prices fall more than expected, and that condition leads to more adverse expectations for future changes in house prices, then housing demand could fall as a result," Mishkin warned a group of key economists meeting in the Washington area this week in one of the bleakest public speeches by a Fed official during this business cycle.

Typically, falling home prices help stave off a downturn by boosting demand for homes and reducing the backlog of unsold homes. Even though U.S. home prices fell last year for the first time in a generation, sales continue to slow, only adding to the glut of inventories.

At the current sales pace for previously owned homes during January, there was more than 10 months' worth of homes for sale, according to the National Association of Realtors.

That was much more than the 6.5 months' supply available during the peak of the housing boom in 2006. That also comes as sales have slipped for the past six months, according to the real estate group.

NO BOTTOM SEEN

But economists fear there is no bottom in sight and that's making everyone jittery: the buyer, the lender and the investor.