Home values nationwide have already plummeted 18.4 percent since July 2006, according to the Standard & Poor’s/Case-Shiller 20-city index. And after Panic Monday’s collapse of Lehman Brothers and the buyout of Merrill Lynch, housing experts say home prices will likely drop much further.

Banking analyst Meredith Whitney warned today that the recent implosion of major lenders means the credit market will shrink and home values will further diminish. Fewer mortgages will be available, she argues, and the magnitude of home-price declines in the next few years could likely exceed expectations of both the markets and the companies, she wrote in a Monday note, according to Reuters. She added that since the onset of the credit crisis over 14 months ago, less than $100 billion worth of mortgages have been securitized.

In January, before the last week saw the failure of seven major lenders, Merrill Lynch warned that home prices could drop by 25 to 30 percent over the next three years. Yet that was a prediction based on the amount of liquidity available then, which will shrink in the wake of the demise of major lenders and investment firms like, not so ironically, Merrill Lynch, which was purchased by Bank of America in a shotgun sale on Monday. With liquidity drying up, lenders will further tighten their belt and owning a home will become more difficult as lending standards increase, Whitney warns.

The news isn’t good for many Minnesotans, who are sitting on a housing surplus and facing compounding negative equity. The September Housing Supply Outlook from the Minneapolis Area Association of Realtors reveals there’s more than a nine-month supply of homes in the Twin Cities. That means it takes the average homeowner nearly ten months to sell their home.

The MAAR likes to tout the fact that the number of homes for sale has decreased slightly over this time last year, by a total of 9.2 percent. But it’s really a quick-spin numbers game that ignores the fact that many homeowners have taken their home off the market and are reluctantly (and at the cost of nearly everything else) holding on to their homes as prices for singe-family homes in the Twin Cities dropped more than 10 percent for the same period last year. If inventory is reduced, it’s due in part to the length of time it takes to sell a home and the price plummets turning away wannabe sellers. The reality remains that there’s still a nearly 100 percent increase in the inventory supply from 2005, when the average Twin Cities homeowner saw their home on the market for only 4.6 months.

What’s more, MAAR likes to look to a slight uptick in sales this summer as further proof that a change is a comin’ to the beleaguered housing market. But the organization again fails to highlight a key reason for the increase: foreclosures. Pending sales this summer were up 12.7 percent over last year, “good news” for home sellers, MAAR claims. But the truth is that foreclosures and short sales continue to plague the Twin Cities and have directly affected the the three-month increase in snatch-’em-up pending sales. It’s not exactly a rosy picture nor one that foreshadows a turnaround when 21 percent of all home sales in the Twin Cities in July were either foreclosures or short sales. That’s a more than 100 percent increase over the same period last year, when those types of unload-for-cheap sales made up only 10 percent of the market share.

In fact, lender-mediated sales for homes priced under $120,000 increased 128 percent in July, while traditional sales for homes priced $190,001 to $250,000 fell a whopping 25.4 percent.

What does this mean for current home owners? Should they sell? Run? Hide? One economist thinks he has an answer to the crisis. Irwin Kellener, cheif economist at MarketWatch, says since it was the lack of transparency and regulation that got us into this mess, perhaps government intervention for homeowners and sellers–not just mortgage giants–is the best solution. In other words, until the next election, we’re all stuck in an uncertain game of wait-and-see.

We’ve been talking about the gem that is illustrative mortgage maps from the Federal Reserve Bank of New York for a while now. The New York Times and a number of other news outlets wrote about the site back in early spring, using it as a primary resource to illuminate the growing mortgage crisis. Of course, organizations like the Minneapolis Area Association of Realtors use their own tools and data to try to demonstrate “growing buyer demand” and that the “market is showing signs of life.” So it’s no wonder MAAR just discovered the maps this weekend and pulled out these important pieces from them for its blog The Skinny :

• Only 53.7 percent of all subprime loans in Minnesota are “current,” (i.e. not currently behind on payments).

• 60.9 percent of subprime loans in Minnesota have had a late payment in the last 12 months.

• 75.5 percent of all active subprime loans in Minnesota have adjustable rates.

• 32.3 percent have a rate that will adjust in the next 12 months.

Still, despite that bleak picture, the folks at The Skinny still try to paint one of a “rebound.” Pending sales are up 6.2 percent in July over same period last year, they say, and supply was down 4.9 percent. Those numbers, however, can be directly attributed to the increase in quick-sell bank-owned properties and only underscore the reality of MAAR’s August 14 report, Foreclosures and Short Sales in the Twin Cities. In MAAR’s own words from this report: Over the past year, the inventory of lender-mediated properties has almost doubled, while traditional inventory has declined by 16 percent. 21.7 percent of all properties for sale at the beginning of July were lender-mediated.

In other words, any increase in pending sales can be directly attributed to the number of lender-mediated properties on the market. The halo effect of these sales goes beyond just dollars; it’s a crisis that will impact the entire city for years to come.

When you break the July sales numbers down my Minneapolis neighborhoods hardest hit by the mortgage meltdown, the eye-popping number of lender-mediated sales (most often foreclosures) spell out what will be a continued and prolonged struggle with blight and crime in those areas:

• 60 percent of home sales in the north Minneapolis neighborhood were lender-mediated.

• 54 percent of homes sales in Camden were lender-mediated.

• 44 percent of home sales in Powderhorn were lender-mediated.

• 30 percent of homes sales in West St. Paul were lender-mediated.

• 27.6 percent of homes sales in Richfield were lender-mediated.

City officials estimate that a foreclosure next door reduces a home’s value by 7 percent on top of the already city-wide 15-percent drop in property values. A boarded-up home next door decreases the value of a neighboring home an additional 7 percent. With foreclosures infesting these neighborhood at rates above, no one is immune from the equity hit. That doesn’t exactly spell “rebound,” does it?

Short sales are when the homeowner makes a deal with the lender to sell the home for less than the outstanding balance of the loan, either as a means to avoid foreclosure or because an unstable market has caused homeowners to be underwater in negative equity. Like when used cars became “pre-owned vehicles,” Realtors like to call these new and popular sales “lender-mitigated sales.” Currently, the sellers are required to pay the taxes on the outstanding balance of the original loan as if the bank gave them a gift for tens of thousands of dollars.

MAAR says the increase in lender-mediated sales skews the median home price and makes it look as though the average Twin Cities home will be hit with precipitous drop of 9.7 percent this year. The researchers claim that the actual price decline of non-lender-mediated sales (regular old home sales) is only 3.9 percent this year.

While that might be true at first blush, there’s a handy bit of information missing in this study. For one thing, it doesn’t break out the number of non-lender-mitigated sales that have to include deep seller concessions in a deflated market. Seller concessions, money given to the buyer for closing costs and repairs in part of the sale, can make up six percent of the total sale price. And the final sale price recorded is the amount before the seller concessions.

Continued: Click “Read more”Jeff Allen, a research manager for MAAR, says the organization doesn’t have any prepared data on what percentage of total sales include seller concessions. “Seller’s concessions are an issue which we are researching as we speak,” he told MinMon. “But I won’t have anything I can share with you today.”

TJ Larson, a Realtor with Edina Realty, says almost all of his sales these days include seller concessions. “In this market, I would say in most cases buyers ask for seller-paid closing costs. The difference now is that buyers look at it as part of the discount in addition to reduced sales prices. A few years ago, a seller would be willing to pay a buyer’s closing costs as long as the buyers were willing to raise the purchase price to compensate. The balance of power has shifted and now
buyers are controlling the ball, at least most of the time, on that one.”

In other words, sellers are being hit with an additional three- to six-percent loss as buyers have the leverage to make more demands. So while it’s better news for sellers who aren’t in dire straits that the decline in non-foreclosed home values  this year is closer to four percent than ten, they should also plan to add another four percent or so to that loss for concessions.