U.S. home prices dropped further in the second quarter -- a record 4.8% from the second quarter of 2007 -- and sent average home values back to 2005 levels, according to a government report released today.

The national numbers, however, were dragged down by foreclosure disaster zones in California, Arizona, Nevada and Florida. In 30 of the 50 states, prices have risen since last year's second quarter, if only by a little, says the report by the Office of Federal Housing Enterprise Oversight, or OFHEO.

For the 20 major cities tracked by the S&P/Case-Shiller home price report, prices for existing homes fell 15.8% in June from the same month last year -- the 19th straight month of declines and the biggest drop the index has recorded.

Las Vegas remained the weakest metro market, reporting a year-to-year decline of 28.6%, followed by Miami and Phoenix, down 28.3% and 27.9%, respectively. Charlotte, N.C., and Dallas recorded their fourth straight months of increases.

The OFHEO index is calculated using mortgages that are bought or backed by Fannie Mae or Freddie Mac. That excludes properties bought with some of the riskier types of home loans.

Foreclosures bring out buyers

Bargain hunters from across the globe are stoking sales in many of the cities that have the biggest backlogs of foreclosed homes.

 

Sales are "very, very hot -- almost in a frenzy," says Bill Mitchell, an agent with Marc Joseph Realty in Fort Myers, Fla., since 1991. There, about one home in 64 is in foreclosure. Mitchell says his company is unloading 10 to 15 houses and condos a week -- nearly three-quarters of them for cash. Sales are hopping in other foreclosure capitals, too, such as Sacramento and Riverside, Calif., Las Vegas and Orlando, Fla.

Biggest second-quarter price drops in OFHEO index
City Past quarter Past year Past 5 years
Merced, Calif.

-34.52%

-15.92%

8.57%
Stockton, Calif.

-31.68%

-14.3%

9.54%
Modesto, Calif.

-28.53%

-12.28%

15.15%
Salinas, Calif.

-23.76%

-11.92%

24.21%
Vallejo-Fairfield, Calif.

-22.98%

-11.82%

17.63%
Riverside-San Bernardino-Ontario, Calif.

-22.95%

-11.1%

47.23%
Naples-Marco Island, Fla.

-22.06%

-8.41%

45.20%
Port St. Lucie, Fla.

-21.95%

-9.78%

33.58%
Cape Coral-Fort Myers, Fla.

-20.75%

-7.22%

37.49%
Bakersfield, Calif.

-18.83%

-6.35%

61.58%

 

In the Sun Belt cities where prices rose fastest, many prices have dropped below the cost to build, luring investors. "You can now buy some properties in some areas and rent them for a 7% to 8% return on your investment, versus putting money in Treasurys at 3%," says Sean O'Toole, the founder and CEO of ForeclosureRadar, a California analytics firm.

That was retired shop teacher Steve Eichner's strategy in July when he bought a beat-up foreclosure property -- a two-bedroom, two-bathroom home in Cape Coral, Fla. -- for $55,000. Eichner, 62, had pulled money out of stocks, unable to bear the poor returns.

As prices slid locally, "it became clear that my money would do better over the next couple of years in property," Eichner says. Prices there may still fall for a while, he says, but when they do rise, he plans to sell the house for a $15,000 profit and buy another to rehab. Meanwhile, he'll add it to his collection of 12 other rental units, which bring in about $750 a month each.

"It is in a nice area with nice shops around it," he says. "I didn't think it would be a potential loss."

Sales also are picking up in a less frenzied way in smaller cities such as Oklahoma City, Colorado Springs, Colo., and Charleston and Spartanburg, S.C., where demand for agricultural crops and other commodities are fueling local economies. The sales of existing (not new) homes rose in the second quarter in 13 states, according to the National Association of Realtors.

No end to slump in sight

The worst housing slump in more than 25 years isn't over, not by a long shot. Most analysts say the bust's bottom is at least months away. Economist Mark Zandi of Moody's Economy.com, for instance, has predicted prices will fall for nearly a year more, not rising again until early 2010.

 

"I'm not a believer that we are near a bottom," says Jonathan Miller, the president of Miller Samuel, a Manhattan appraisal company. "Credit is much tighter and harder to get. That keeps prices at a lower level. The law that just passed will help some people that are in pain, but that's not going to change the housing market. That's going to take years."