It’s become a broken record of late: Home-price declines breaking records. With the economy on the skids and the subprime crisis still unfolding, home values are getting devoured first. This morning the S&P/Case-Shiller home-price index was released, revealing that the trend doesn’t show any signs of slowing down. The 20-city index showed year-to-year August price declines of 16.6 percent. Minneapolis saw a drop of 13.3 percent over the year period, with a 1 percent decline from July to August.

Recent reports indicate that home sales are up, a possible sign of a turnaround, some analysts say. But trusting in that marker is like Greenspan relying on capitalism or ghosts relying on astrology–it’s meaningless and totally futile. Home sales are up as a result of the sharp increase in foreclosures and short sales, a bad sign for homeowners and an already shaky economy. In fact, according to the most recent report from the Minneapolis Area Association of Realtors, the inventory of foreclosures and short sales–property sold for below its current loan value– has increased more than 64 percent of the past year. Of the current homes for sale in the Twin Cities, nearly 30 percent are foreclosures or short sales.

The hardest hit neighborhood in Minneapolis is on the Northside, where lender-mediated sales (short sales and foreclosures) account for 69 percent of the inventory of homes for sale in October. Powderhorn is a close second with nearly 52 percent. And the suburbs aren’t immune to the growing problem. Foreclosures and short sales make up more than 63 percent of all the October homes sales in Brooklyn Center.

In St. Paul, the Central neighborhood’s current home sales are more than 63 percent lender-mediated, while Phalen’s foreclosures and short sales have risen to 60 percent this month.

Minneapolis saw a slight increase in home prices from June of this year to July, with values rising by 1.3 percent. Yet the small uptick doesn’t portend a turnaround just yet: Home prices in the Twin Cities generally peak in summer months. Minneapolis’ home-price index is currently at 143.43, according to the report, down from its height of 170.34 in November of 2005.

Home prices from September 2007 through August 2008 in the Twin Cities are down 7.6 percent, according to the Minneapolis Area Association of Realtors, dropping from an average price of $274,870 for a single-family home to $254,028. Currently the Twin Cities have 9.9-month supply of homes on the market, a saturartion that hasn’t budged since last year. And condominiums are sitting on the market longer these days, increasing from a 10.8-month supply last year to taking more than a year on average to sell.

The good news in all of this? If you’re a buyer, the number of homes for sale under $120,000 has increased by 104 percent since last year. That’s positive news for affordable housing, which Minneapolis has been seriously deficient in for more than a decade. But it’s bad news for the hundreds of thousands of homeowners in the Twin Cities who are seeing their equity whittle away in the face of the housing crash and as foreclosures increase all around them.

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.