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Housing Takes Another Header

Think we've seen the worst from housing? Think again.

The latest S&P/Case-Shiller Home Prices Index shows that home prices are not only dropping like rocks, in many places, the rate of drop is increasing. The figures, which cover the period ending July, 2007, detail a 4.5% year-over-year drop in the index's 10-city composite, and a 3.9% drop in the 20-city composite.

That's the worst performance since 1991, which is why you should click that link and see the whole story. (It launches a PDF with a graph that clearly explains how we got to where we are.)

Previously hot markets like Phoenix and Tampa were among the worst tracked, but areas that sat out the bubble, like Detroit, are also suffering. Near Fool HQ, the argument I often hear about home prices never falling (because there's reliable government spending, big influx of population, blah, blah, blah ...) is shown to be a complete fiction, as D.C. area prices tumbled 7.2% year over year.

Remember, the Case-Shiller index tracks differences in sale prices for the same homes, and it screens out data that would compromise the comparisons, such as major renovations and non-arms-length sales. It looks at existing home prices in a more detailed way than the likes of the National Association of Realtors, which today reported a year-over-year increase in median prices that is directly at odds with the slow pace of sales.

It's going to be a long time before the excesses are wrung out of this market, and I anticipate more investors getting stung. We've already seen that the prices of new homes are just as vulnerable in the current market. Hovnanian Enterprises (NYSE: HOV  ) recently had a well-publicized "Fire Sale," which knocked about 20% off the price of new homes.

With foreclosures on the rise, more fire sales are likely in the existing and new home markets. I expect to see builders like Pulte Homes (NYSE: PHM  ) , D.R. Horton (NYSE: DHI  ) , Beazer Homes (NYSE: BZH  ) , Centex (NYSE: CTX  ) , and Lennar (NYSE: LEN  ) resort to similar desperate moves.

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