How can a report on a falling economic indicator demonstrate some level of optimism?  Reuters unexpectedly demonstrates the technique in a report on a further drop in seasonally-adjusted average home prices in the latest S&P/Case-Shiller index, in an article headlined “Home price decline moderates in April”:

Home prices dipped in April from March, though the pace of decline moderated at the start of the spring buying season, a closely watched survey said on Tuesday.

Even so, economists cautioned house prices will likely continue to crawl along at low levels, and could have further to fall, as the battered housing market works through an excess amount of houses for sale, ongoing foreclosures, tight credit and weak demand.

The S&P/Case-Shiller composite index of single-family homes in 20 metropolitan areas dipped 0.1 percent on a seasonally adjusted basis. A Reuters poll of economists had forecast a decline of 0.2 percent.

Do I believe that we’re closer to finding a bottom in the market?  Well, we’re certainly closer than last year, but that’s pretty obvious given the fact that housing prices have continued to decline.  Wherever and whenever that bottom is, we’re approaching it.  The question is distance rather than direction, isn’t it?

Is there any indication that housing prices will stop falling any time soon?  Not really.  Reuters does note that non-seasonally adjusted prices rose for the first time in eight months, but that rise eight months ago didn’t stop housing prices from falling afterward then, either.  Housing prices will continue to fall as long as prices still outstrip market value, and that relies on two factors: the amount of irrational valuation still left in the market from the 1998-2008 bubble, and the inventory of foreclosures.  Foreclosures are difficult to gauge, mainly because it relies on whether currently stressed homes will end up in default, which depends on job creation and unemployment.  Neither of those factors give a lot of confidence that we’re turning a corner.

How about home prices and their position in the bubble?  That news doesn’t look good at all, as this chart from the S&P/Case-Shiller report demonstrates:

The chart shows (as does the data) that the 10- and 20-city composite price indices have returned only to the 2003 valuations, or about halfway up the bubble.  Valuations won’t fall all the way to 1999 levels, as inflation also factors into home prices, but even with that prices have to fall at least a little to relink home prices to inflation.  Had the 10-city composite index grown at a steady 3% annual inflation rate from December 1999 forward, which would have somewhat outstripped inflation during the period, the index would have reached 128.1 in January 2008 at the start of the recession.  Assuming we would have avoided the entire economic crisis due to the housing bubble collapse, we would now be at 141.2 rather than 154.7, but the more realistic bottom probably falls somewhere between the 128.1 and 141.2 figures.  I’d guess, under current conditions, that it’s closer to the 128.1 figure.

That’s not as big of a drop as we have seen, but that’s only because of how much irrational valuation we’ve managed to wring out over the last three years.  If we can keep government from interfering with the process, we might get the rest of it out and reposition the housing markets for their traditional, inflation-linked long-term growth — but if we can’t stop foreclosures and joblessness from undermining rational valuations, we may keep right on tumbling.