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Home Prices Worse Than Expected

Prices lag sales. Say it again. Chant it if you will. On the way up and on the way down, that's the way it works.

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AP

We were therefore expecting to see a big drop in home prices a few months after the expiration of the home buyer tax credit, not now. Well they're here now. Today the FHFA, overseer of Fannie and Freddie, released its monthly home price report which chronicles the sale prices of homes with Fannie and Freddie loans.

Things had been improving last Spring, as other indices show as well, but not only did they take a dive in July, the June number was revised down, and the following quote in the report really says it all:

"The unusually large revision mainly reflects the addition of new data from late June that show considerably weaker prices than earlier in the month."

Keep in mind that in June, the tax credit was still in effect for closings. That means that home prices started to falter even before the tax credit had finished doing its work. The numbers for July show a 3.3 percent drop in home prices year over year, which is a lot lower than many expected and has some folks revising long-term price expectations yet again.

"In our latest forecast we had them dropping 8 percent, but this number was a lot bigger than I thought it would be," says Patrick Newport over at IHS Global Insight. "So I think maybe a ten percent drop over the next year."

Newport thinks that the market is actually overcorrecting, just as prices overshot on the way up. He says houses are pretty fairly valued now, and yet prices are still dropping due to weak demand and a large volume of foreclosures. Think about it: We have a 12.5 month supply of homes on the market right now and about 7 million homes where folks aren't current on their mortgages.

Some of you may note that the S&P/Case-Shiller home price indices show more positive results. That report is a three-month moving average, so you will see the effects of the tax credit in it far longer than other reports.

Tomorrow we will get the existing home sales numbers for August, and everyone is calling for a bump up in sales.

Remember, sales dropped 27 percent in July because of the expiration of the tax credit.

That's the depths from which the numbers will move, so keep that in mind when the headlines scream (maybe) that sales "rebounded" in August.

And one final note...I'm Tweeting. Forgive me, but apparently I'm the only one who wasn't. I promise to send only realty-related messages that might inform your investing decisions. You will not know what I'm having for lunch. If you want to follow me on Twitter, please do @Diana_Olick

Questions? Comments? RealtyCheck@cnbc.com And follow me on Twitter @Diana_Olick