Case-Shiller report: Home prices ended lower in 2011

— -- Home prices fell sharply at the end of last year and the likelihood of a turnaround this year looks grim.

Prices were down 4% in the fourth quarter from the same period in 2010, according to the Standard & Poor's Case-Shiller national home price index released Tuesday. Prices are nearly 34% below their peak in 2006's second quarter, rolling back average home prices to 2002 levels, the index shows.

What's more, home prices fell in December from November in 18 of 20 leading cities, according to another Case-Shiller index.

The market "might be on the verge of recovery" but "might not," said the index's co-creator, Yale University economist Robert Shiller, in a conference call Tuesday.

Yet there are more reasons for optimism now than there were at this time last year, he said.

On the plus side, housing starts are up and unemployment is down from the same time a year ago.

Yet unemployment, at 8.3%, is still high. Gas prices are rising and it's still hard to get a home loan. Those factors will continue to restrain home buyers, Shiller says.

In addition, "People now know that house prices can fall," says economist Karl Case, Shiller's price index collaborator. That marks a "permanent shift" in the nation's thinking about home prices, he says. Before the recent downturn, home prices hadn't fallen nationally for decades.

Case described the market now as "the little engine that could."

Household formation, which drives demand for homes, rebounded in the last nine months of last year, he said. What's more, the inventory of homes for sale has declined.

Previous signs of stabilization for home prices, such as in mid-2011, proved untrue, said David Blitzer, chairman of S&P's index committee. "Neither the economy nor consumer confidence was strong enough to move the market in a positive direction as the year ended," Blitzer said.

In December, Miami and Phoenix were the only two of 20 major cities posting monthly price gains, up 0.2% and 0.8%, respectively. Only Detroit experienced year-over-year gains, with prices there up 0.5%.

The Case-Shiller indices include sales of distressed homes. That's one reason they show home prices falling, says IHS Global Insight economist Patrick Newport.

Foreclosures picked up at the end of the year as lenders overcame some processing delays, says PNC Bank chief economist Stuart Hoffman. As that continues, PNC expects home prices to drop through the first half of this year.

Another home price index, from the Federal Housing Finance Agency, includes fewer sales of distressed homes. It shows that prices for non-distressed homes may be stabilizing, Newport says.

Home prices, as measured by Case-Shiller, will drop another 5% to 10% this year, Newport predicts.