The median price of homes sold in the Twin Cities metro area during February dropped 12.5 percent, falling below $200,000 for the first time in at least four years.

The decline was one of the largest yet in the ongoing housing slump and shows that the growing number of foreclosures is having an impact far beyond the families that are losing their homes.

With the number of forced sales rising -- there were nearly nine houses on the market for every expected buyer in February -- and banks being more strict about lending standards in an effort to stem their losses, the short-term prospects for recovery are slight.

"I don't see it getting better in the immediate future," said Ryan O'Neill of Remax Advantage Plus, who cited bargain-priced foreclosures as the primary force behind the price declines.

"Your typical home seller doesn't think that these properties factor into their value," he said. "But it does hurt ... and that's a big reason why prices are doing what they're doing."

The overall inventory of houses on the market -- 29,842 in the metro region in February -- remains nearly double what is considered equilibrium. Sales, meanwhile, are still at weak levels.

February is typically one of the slowest months of the year and was made worse this year by record low temperatures. The month saw 2,009 closed sales and another 3,087 purchase agreements, a 10 percent decline in closed sales and almost 14 percent decline in pending sales compared to the same month a year ago.

The smaller number of transactions is making for some wide divergences in median prices in submarkets. Maple Grove, for example, posted a 7 percent increase in sale prices, while Minneapolis posted a 9.5 percent decline and St. Paul had a 23 percent decline.

The February report, which only tracks home sales through the Regional Multiple Listing Service, offers another dose of sobering news for homeowners, many of whom are receiving falling property value assessments but are being taxed at higher levels.

Kevin Knudsen, president of the Minneapolis Area Association of Realtors, said the median sales price is being heavily influenced by a steady surge in the number of low-end home sales, including many that are bank-owned.

'Market has shifted down'

During the past 12 months sales below $150,000 represented 14 percent of the total, an increase from 9.2 percent during the previous 12-month period, he said. Each percentage point represents about 400 transactions.

"The market has shifted down to the lower price ranges," said Mark Allen, chief executive officer for the Minneapolis association. "It's safe to assume that some of that drop is real in terms of how it impacts a typical house, but a significant segment of that drop is reflective of where the buyer activity is taking place."

On Tuesday, RealtyTrac said defaults and foreclosures in the metro area during February (including default notices, auction sale notices and bank repossessions) had increased more than 60 percent compared to February 2007.

However, the Twin Cities are in better shape than the national average on the foreclosure front. One in every 897 households locally were affected, compared with one in every 557 households nationwide.

The broader market is also being punished by a soft condo market, which has an even greater overhang of listings than single-family houses, and by the lack of high-priced new construction, which has come to a virtual standstill in some communities.

"Supply is more out of balance in the condo market than in some of the other markets," Allen said.

The association doesn't break out sale prices by unit type, but the supply of condominiums throughout the metro area has exceeded the market average.

What remains to be seen is whether February's percentage decline represents a new bottom or a new acceleration to the decline in prices.

"That's a one-month window and you'd look at that and say the sky is falling, but that's only the houses that sold one month ago," said Greg Bauman, president of the Saint Paul Area Association of Realtors.

Regardless of what happens in coming months homeowners need to accept that a roll-back in prices is inevitable given the outsize gains of recent years, he said.

However, Bauman expects that by for all of 2008 the average decline in the median sale price will be much more moderate than February's raw result -- more like four to five percent.

"I would consider that part of the normal adjustment," he said.

Jim Buchta • 612-673-7376