By NICK TIMIRAOS And JUSTIN LAHART
Home prices fell to new lows in 11 cities in December, the latest sign that the weak housing sector remains a soft spot in the U.S. economy.
Across 20 major metropolitan areas, home prices fell 1% in December from November, according to the S&P/Case-Shiller home-price index released Tuesday. The index has declined for five consecutive months, all but erasing the gains in home prices since the recession ended in June 2009.
The feeble housing report comes as other indicators suggest that the economy is gaining ground. Another report Tuesday showed Americans' attitudes on the economy growing more upbeat.
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The housing market faces the risk that millions of foreclosed properties will hit the market in coming years, putting downward pressure on prices if demand doesn't pick up.
Economists at Capital Economics estimate that for the current level of demand, there are 850,000 too many homes for sale. Robert Shiller, the Yale University economist who co-founded the index that bears his name, said Tuesday that there remains a "substantial risk" of another 15% or 20% decline in home prices. Many economists say another 5% decline is more likely and that the housing market should stabilize as economic growth accelerates.
Price declines in recent months have been driven by a rising share of distressed sales, including homes sold by lenders that have taken properties over from former owners. Banks are typically much faster to reduce prices and unload properties quickly than homeowners.
In Las Vegas, for example, the median price of previously owned homes fell to $109,000 in January, down 9% from a year ago, driven by sales to investors in low-end properties. Half of all homes sold during January were purchased with cash, and more than three-quarters of all homes were vacant when sold, according to SalesTraq, a local real-estate data firm.
Falling or flat prices can put pressure on the housing markets because they leave more borrowers underwater, or with homes worth less than the amount owed on their mortgages. That in turn can lead to more foreclosures and may also be hindering the labor market's ability to recover, because it makes it more difficult for people to take advantage of job opportunities.
John Gonzalez, a postdoctoral student at the University of Florida, has accepted a tenure-track teaching position in Kansas and has to choose between selling his Gainesville, Fla., condo at a loss, or becoming an "accidental landlord" and renting out the unit at a loss.
Mr. Gonzalez, 32 years old, owes $30,000 more than the current market value of the two-bedroom unit, which he bought with a no-money-down loan in 2006. He has applied at his bank for a loan modification, which would make it easier for Mr. Gonzalez and his wife to cover the costs of renting the unit, he says.
"We're not really ever going to get back the money on this place," Mr. Gonzalez says. "I'm not beyond renting, but it's one of those things that's really scary when you're not living in the same town."
Despite the housing market's woes, consumer attitudes are improving. In a separate report Tuesday, the Conference Board said that its index of consumer confidence rose to 70.4 in February from 64.8 in January. That was the highest level since February 2008.
"The broader news flow on the economy has been better, even if the housing market is in a slow bleed," says Bank of America Merrill Lynch economist Ethan Harris.
Mr. Harris says he expects home prices to creep lower over the next year or two, as distressed sales weigh on the market. Even as the rest of the economy improves and consumer attitudes brighten further, people will resist spending much. "It's an ongoing message to households to be conservative about your spending and rebuild your savings because you can't trust the housing market as a wealth-creating machine," he says.
Write to Nick Timiraos at nick.timiraos@wsj.com and Justin Lahart at justin.lahart@wsj.com
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