Published May 31, 2007

US home prices drop for the first time in 16 years

(NEW YORK) US home prices dropped last quarter for the first time in almost 16 years, signalling a prolonged housing recession.

The value of a dwelling dropped 1.4 per cent in the first three months of the year from the same period in 2006, according to a report by S&P/Case-Shiller. Prices last fell during the third quarter of 1991.

This 'is a reaffirmation of the pullback in the US residential real estate market', Robert Shiller, chief economist at MacroMarkets and a professor at Yale University, said in a statement. The retreat may deter owners from tapping into home equity for extra cash, economists said. Combined with record gasoline prices, lower home prices raise concern consumer spending, which accounts for more than two-thirds of the economy, will slow.

'We don't see a big rebound in economic growth,' said Scott Anderson, a senior economist at Wells Fargo & Co in Minneapolis.

The housing slump has yet to shake sentiment. An index of consumer confidence rose to 108 this month from a revised 106.3 in April, a five-month low, the New York-based Conference Board reported on Tuesday. The private research group's index averaged 105.9 last year.

The decline in prices may not be large enough to concern the majority of home owners, economists said. The drop in prices in the 12 months ended March pales in comparison to the 157 per cent gain over the previous 15 years.

Sellers are reducing prices to lure buyers as the supply of properties on the real-estate market grows. Rising foreclosures as subprime borrowers default on loans may add to the glut of unsold homes, delaying a recovery from the housing slump, economists said.

Declines in home prices in 20 US metropolitan areas accelerated in the 12 months ended in March, the report also showed. Home values dropped 1.4 per cent in March from the same month in 2006, after declining 0.8 per cent in the year ended February.

Prof Shiller and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

Prof Shiller's 2000 book Irrational Exuberance predicted the stock market would slump and a second edition, published in 2005, said housing was in the midst of the biggest speculative boom in US history. - Bloomberg