American economy suffers from dropped housing prices

Third-quarter home prices in America fell 4.5 percent, the sharpest drop since Standard & Poor's began its nationwide housing index in 1987 and another sign that the housing slump is far from over.

One of the index's creators also predicted that there is a significant chance of a recession as the U.S. economy contends with falling housing prices, spiking foreclosures and turmoil in the financial markets.

"Over 50 percent," said MacroMarkets LLC Chief Economist Robert Shiller, giving his odds for a recession. Other economists have put the chance of recession at one in three.

"We're in the aftermath of the biggest housing boom in history, so how do we use historical data to judge the outcome?" he said. "We're out of the range of the normal variation in the data and I take that as very significant."

The S&P/Case-Shiller quarterly index tracks prices of existing single-family homes across the nation compared with a year earlier.

The index also showed that prices fell 1.7 percent from the previous three-month period, the largest quarter-to-quarter decline in the index's history.

After 13 years of rising home values - with the greatest increases occurring in the first part of this decade - the housing market has started to unravel, spreading from Main Street to Wall Street.

Declines in housing prices have kept homeowners, especially those with riskier mortgages and spotty credit, from refinancing, sending them into default and foreclosure at a quickening pace. More foreclosed properties have added to an already ballooning inventory of homes on the market, further depressing values.

Investors holding securities backed by mortgages have taken billions of dollars in losses as they rewrite the value of defaulting assets. Spooked, they have stopped funding mortgages, hurting lenders' ability to issue new loans and shrinking demand.

The Federal Reserve has stepped in, cutting interest rates two consecutive times - once by a half-point in September and by a quarter-point in October- to 4.5 percent to encourage economic expansion. The Fed said last week it expects the housing slump and credit crisis to slow economic growth and push unemployment up slightly next year.

A separate S&P index covering 20 U.S. metropolitan areas showed a home price drop of 4.9 percent in September from a year earlier. Only five metro areas - Atlanta, Charlotte (North Carolina), Dallas, Portland (Oregon), and Seattle - showed an increase in prices, but S&P noted that the pace of their increases is decelerating.

Tampa and Miami led the index with the lowest year-over-year declines at 11.1 percent and 10 percent, respectively. It also showed drops in San Diego of 9.6 percent; Detroit, 9.6 percent; Las Vegas, 9 percent; Phoenix, 8.8 percent; and Los Angeles, 7 percent.

The S&P's 10-area index decreased 5.5 percent in September from the previous year.

On Thursday, the Washington-based Office of Federal Housing Enterprise Oversight is to release its third-quarter index of U.S. home prices.

Unlike the S&P index, the government's calculation of home prices has remained in positive territory. It is calculated based solely on loans of $417,000 (280,355 EUR) or less that are bought or backed by government-sponsored mortgage companies, Fannie Mae and Freddie Mac - excluding many of the riskier loans that have gone bad this year.

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Author`s name Angela Antonova