Real estate woes deepen as home prices face more pressure

Home prices are highly seasonal, due to the different mix of homes that sell at different times of the year, but the latest reading for September shows home prices are under added pressure now; this is not just due to the high concentration of distressed properties on the market.

The more concerning aspect of the report is that while home prices including foreclosures and short sales fell 4.1% from September of 2010, they still fell 1.1% when you exclude distressed sales.

That has not been the case in previous months.

"The acceleration in the rate at which the CoreLogic house price index is falling reflects the slowing in the pace of job creation and wider economic growth earlier this year," says Paul Diggle of Capital Economics.

While the unemployment picture has weighed heavily on home prices all year, the new uptick in foreclosure starts will likely have a more drastic effect. Foreclosure start rates on severely delinquent loans have increased to over 10% a month in the private-label RMBS (residential mortgage backed securities) sector, according to Fitch, which is now estimating another 10% decline in home prices before they fully stabilize.

Paul Diggle doesn't agree with the 10% drop. "After all, relative to historical norms housing is now about 25% undervalued against incomes. And with mortgage rates lower than at any point in the past 40 years, mortgage affordability looks favorable," he argues.

That may be, but he's not taking into account consumer confidence, or lack thereof. 36% of Americans say that mortgage rates will go up over the next year, according to Fannie Mae's October housing survey. That's up from the previous month. They also expect rents to rise, and yet a full third still say they would rent their next home rather than buy it. More telling is that 77% say the economy is on the wrong track and an all-time high expect their financial situation will stay the same over the next year.

That's not a great atmosphere for a surge in home buying.

Copyright 2011 CNBC.com.