How low will home prices go?

By Diana Olick, CNBC Real Estate Reporter

Did I say double dip? Well I'm not the only one.

Today's home price report from S&P Case Shiller proves the point. Remember, this report is based on the sale prices of transactions that closed in January, but it is also a three month running average. That means that at least two thirds of the price deals were struck in October and November, when mortgage rates were at historic lows, providing more purchasing power; they only began spiking in December.

So prices in the top twenty U.S. Markets were down 3.1% in January, year over year, and the slide is accelerating. Eleven of the top twenty hit new price lows on the index. Only San Diego and Washington, DC are showing annual improvements with San Diego just barely out of the red.

“Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future” says Standard and Poors' David M. Blitzer. "The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing."

What's so indicative of that double dip to me is that many of the markets with the biggest price drops are not those original boom-to-bust markets in California and Florida. Prices in Atlanta are down 7 percent year over year, Chicago down 7.5 percent, Minneapolis down 7.6 percent and Seattle down 6.7 percent. The S&P Case Shiller is now just 1.1 percent above the low of April 2009; I guess we're not officially in a double dip until we go below that, but we're pretty close.

"Bottom line, prices are retesting the lows again with no reason to think they won't break below," notes Miller Tabak's Peter Bookvar. "The question of course is to what degree and whether bank balance sheets are prepared. Most unfortunately do not assume a double dip in pricing."

So how much lower will prices overall go? 5 percent? More? Yes, we saw an improvement in contracts signed to buy homes in February, and some claim that the reported huge drop in sales of new construction is just plain wrong because the Commerce Department's data is supposedly bad.

Here's one thing we know for sure: Foreclosure inventory volume is outpacing foreclosure sales, and foreclosure sales are already more than one third of the market right now. Distressed properties sell at a big discount, pushing prices down all around them. Banks are pushing to get rid of foreclosed properties now, and pushing to get borrowers in the process out of the process before the state attorneys general and federal regulators come down with some kind of painful settlement. That's more inventory, as consumer confidence continues to fall. You tell me where prices are headed...