By ANDREW JEFFERY

The broken record rambles on: Home prices keep falling.

The latest reading from the S&P/Case Shiller Home Price Index showed another record decline, as prices tumbled 18.5% from a year ago. And again, the worst performing metro regions were out west, with Phoenix, Las Vegas and San Francisco leading the way to the downside. The 20-city index has now slid 27% from its 2006 peak.

The ongoing home price declines, which many attribute to steadily rising foreclosures helped spur the latest government-backed efforts to rescue the housing market. And while most commentators heavily criticized the Obama Administration’s $275 billion housing relief plan, take a read of Cirios’ Austin Nelson’s excellent take — a little optimism never hurt anyone, especially with the resounding and ubiquitous negativity we read in the daily headlines.

There isn’t much new to glean from the latest Case-Shiller Home Price Index, it’s still just bad out there. However dire the data continue to be, keep in mind home sales transactions typically bottom prior to prices. In the markets first to see precipitous declines, Cirios data analysis indicates ongoing increases in sales. And while the most distressed areas certainly show the strongest rises in transactions, mid-range areas are seeing more activity as well. Not so for the high end, where buying activity has all but evaporated.

But you, our Cirios readers, already knew that.

Far from being a bottom call, this is trend an example of the housing correction at work. While we would argue prices will continue to decline for foreseeable future, the reality is that homes are more affordable today than they were yesterday. And will be more so tomorrow. And tomorrow. And so on.

At some point in every market, prices begin to make sense again and buyers gingerly step into the water. The sharks are still circling, to be sure, but most are full and lazy, the new arrivals having more and more trouble finding a tasty snack.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Foreclosure: It’s not just for those “subprime” people anymore.

Besieged by collapsing home prices and frightened banks scrounging for cash, even the real-estate industry’s brightest stars are finding there’s no place to hide. According to the New York Times, small and mid-size homebuilders who thrived during the housing boom are seeing credit lines pulled even before they miss a payment.

Banks like JPMorgan (JPM) and GMAC, the financing arm of General Motors (GM), loaned builders hundreds of billions of dollars — even as the housing market began to falter — to buy up vacant land. Now that demand for new homes has plunged (and buyers in some areas can pick up previously constructed homes for less than it costs to build a new one), builders’ ability to turn a profit has been effectively eliminated.

It’s estimated that over 20% of the nation’s homebuilders have closed their doors, even as big builders like D.R. Horton (DHI), Lennar (LEN) and Toll Brothers (TOL) limp along, bleeding cash and fighting for survival.

Lenders, for their part, are scrambling to mitigate risk.

Collateral, the term used to describe the assets against which loans are given out, protects lenders in the event of borrower default. As the value of collateral rises, banks become better protected since their loans are now backed up by a more valuable asset. In a downturn, however, falling collateral values means risk increases with each passing day.

In response, banks may ask borrowers to send in cash to make up for the lost value of their investment. These margin calls, as they’re known, can quickly force small firms into insolvency.

Such was the case for Brown Family Communities, a well-known builder in the Phoenix area. The Times reports the firm’s lender, JPMorgan, demanded millions in cash for land on the outskirts of town that had fallen in value. Brown balked, since he was yet to miss a payment and had been a longstanding client of the bank with an impeccable record. Ultimately, Brown lost the property and closed his doors, complaining “The real estate market is gone.”

Other builders have suffered a similar fate, proving that despite extensive government-led efforts to minimize losses from investments gone awry, the fundamental tenets of capitalism remain intact.

Bad investments should yield losses, period. Savvy new buyers, able to handle the risk inherent in buying distressed properties, can make bets that have the potential to reap huge rewards. This cycle of profits and losses fuels economic expansion. By forestalling losses, intervention delays recovery.

The speculative buying of vacant desert land on the edges of the Phoenix city limits in 2005 and 2006 certainly qualifies as a poor use of borrowed money. That builders are being asked for cash to cover banks’ potential losses should be seen as nothing more than prudent lending – something builders and other real-estate investors spent the boom years conveniently forgetting.

This post first appeared on Minyanville.

Put on those Rose-Colored glasses, it’s time again for the Existing Home Sales data:

• September sales came in 5.5% higher than last month, at 5.18 million (annualized) compared to estimates of 4.95 million
• Sales were 1.4% higher than last year — the first year-over-year increase in 3 years
• Inventory shrank to 9.9 months worth, from 10.6 months
• Median home price dropped to $191,400, the lowest since April 2004
• Distressed sales made up 35-40% of sales, with 80% of those going to owner-occupiers (higher than the usual 75%)

Per normal, the National Association of Realtors chief economist Lawrence Yun is as optimistic as ever. He gets paid to obfuscate the truth.

Per normal, the National Association of Homebuilders chief economist David Seiders is as pessimistic as ever. The worse it is, the better chance his group gets on the government dole.

It’s messy out there in housing land, but that’s not exactly news. Keep in mind that the year-over-year numbers line up against this time last year, when credit markets first seized up and home buying all but evaporated for a couple months. Easy comparisons make for premature bottom call.

Of all the myths we were fed about the housing market and its implications for the broader economy, there is no greater one than the spin that housing couldn’t possibly drag the economy into recession. Since the downturn started in the context of economic strength, the argument went, we were better positioned to absorb the fall in home prices. This couldn’t have been more wrong.

Traditionally, housing slowdowns are caused by economic problems, not the other way around. If delinquencies starting running up when times were “good” what would happen when things got “bad?” We are now finding out.

Markets that haven’t seen forced sales in decades could soon find out what it’s like to watch housing wealth evaporate at an alarming pace. Everyone knows Detroit, Stockton, Miami, Phoenix — these areas are in bad shape. But what about upper-middle class suburbs where people haven’t faced layoffs in years? These are the neighborhoods that are more worrisome, since their inhabitants have been largely insulated from the downturn thus far. Prices ran up just as far, albeit for slightly more fundamental reasons, but home values were inflated by fraud and loose lending just like everywhere else.

It is, unfortunately, only a matter of time before reality comes back home.