Housing Prices Rebounding

The Case-Shiller Index, the gold standard of housing price indexes, showed widespread increases in July versus June.

Housing prices do have an element of seasonality to them, so it is best to look at the seasonally adjusted numbers. Most of the press makes the mistake of using the unadjusted numbers, so this analysis might have some differences from the headlines you see elsewhere.

However, on both a seasonally adjusted and unadjusted basis, the story is much the same: at least for now, the bear market in home prices appears to be over. On a monthly basis, the composite 10 index (or C-10, which has a much longer history) rose to 154.69, a gain of 1.26% on the month and cutting the year over year decline to 12.79%. From the peak in May of 2006, the C-10 is down 31.62%.

The broader Composite 20 index posted a monthly gain of 1.15%; it is off 13.32% from a year ago and 30.60% from the May 2006 peak of the housing market. The gains were widespread, with 17 of the 20 cities posting gains.

While home prices are way off from the bubble peaks, overall they remain about twice as high as the stable 75 to 85 range they were stuck in for almost a decade between 1988 and 1998. In real terms, then, home prices are coming back towards normal -- they are not particularly cheap. The graph below shows the history of the two composite indexes.



For the month, the biggest gains came from Minneapolis, rising 3.09%. On a year-over-year basis, prices in the Twin Cities are down 17.3% and are off 29.5% from May 2006. San Francisco took the silver with a gain of 2.90%, but it is down 17.9% from a year ago and 39.46% from the peak. Chicago took the bronze with a 2.10% monthly gain. Home prices in the Windy City are down 14.23% from a year ago and are off 23.33% from the peak.

This time in Las Vegas the house didn’t win, although Vegas does win for losing. For the month, home prices fell 1.85% -- by far the largest monthly decline. Over the last year, those who gambled on housing there are down 31.4% and are off 53.30% from the peak. Detroit might have been able to break into the win column in football, but its losing streak in housing continues. Motown posted a 0.36% decline for the month and is off 24.69% for the year and 38.35% from the peak.

Keep in mind that these indexes cover the whole metropolitan area, not just within the city limits, so it is not just the prices of giveaway abandoned homes in the city center that are still declining. Seattle was the only other city to see a decline for the month, falling 0.26%. It is off 15.36% on a year-over-year basis, and 22.35% from the peak.

The second graph below has an interesting way of presenting the city-by-city data. It shows the decline from the peak (actually from the individual city peaks; the percent declines I mentioned above were from the national peak date) currently and through December of 2007 (blue bar) and December 2008 (yellow bar). Thus if the red bar is below the yellow bar, prices in that city are down year-to-date.

It shows that there is no real clear pattern between if a city was a big early decliner and more recent price movements. Las Vegas and Detroit were both hit hard early in the housing bear market and continue to face difficulties. San Francisco and San Diego were also hit hard early, but have seen only minor declines year to date. Cleveland was hit early, but has actually been seeing gains so far this year. Dallas and Denver had relatively small early losses and are now also seeing year-to-date gains. Other early holdouts in the price declines like Seattle and Portland are showing some of the largest year to date declines.



The back-to-back increases in the Case-Shiller index are very significant in that they provide some hope that the number of people who are underwater in their houses is going to stop rising (except perhaps in Atlanta. But that is a different issue). Owing more on your house than it is worth is the single largest predictor of if a homeowner will stop paying the mortgage and eventually be foreclosed upon.

Those foreclosures obviously hurt the bottom line of the whole mortgage complex, from the big banks like Bank of America/Countrywide (BAC) that made the loans, to the myriad of institutions that hold the paper that those mortgages were sliced and diced into, to the private mortgage insurers like MGIC (MTG) and PMI Group (PMI) to the GSEs Fannie (FNM) and Freddie (FRE), and ultimately we the taxpayers, who own 80% of each of them.

I doubt that we will see a rebound in housing prices that will lift significant numbers of people who are currently underwater back into a position of having equity in their houses again. However, this recent stabilization will stop their numbers from swelling further. That is a major step forward and is good news.

Comments

[TeresaE:]

"Rise" in prices, what a crock.

This increase can be attributed to people overpaying for homes because they are being gifted concessions and government checks.

99% of Americans buying homes do not understand the true carrying costs of all the "help" they are currently receiving. Bigger tax bills and thousands in interest.

And housing ALWAYS increases in July as families want to buy, close and move before school starts.

Can't wait to see how the rest of the year and next spring play out for the green shoots crowds.

Sep 29 12:07 PM

[Dirk:]

Theresa, that is why I used the seasonally adjusted numbers in the analysis, rather than the NSA data that is usually presented. I agree that we are not totally out of the words on the housing front, but some stabilization is a good sign. The last thing I would expect is a big rebound in prices. Relative to incomes and rents, housing prices are back near normal historical levels, not cheap, but near normal. However incomes are not doing all that well with UE near 10% and still rising, and with near record rental vacancy rates, there is a big risk that rental prices start to slide significantly, re increasing the gap and putting renewed pressure on prices. A second wave of foreclosures (banks have been holding off on FC's even as delinquency rates continue to climb) would also put a lot of pressure on prices. However, the current stabilization of prices might just slow down that second wave of FC's.

Sep 29 01:17 PM

[tunaman4u2:]

Keep housing unaffordable, require higher wages to support mortgage, companies choose cheaper labor overseas, decreased jobs & thus wages in US, homes become more unaffordable.

Law on unintended consequences manipulating the price of everything the Fed will find

Sep 29 02:23 PM

[Russ Wetherill:]

Dirk, you are correct in that the bear market in home prices does appear to be over. But, appearances can be deceptive. It is important to assess the impact of underlying market drivers to determine whether or not the appearance can be believed.

For instance, the $8k buyer credit has artificially increased the purchasing power of thousands of new buyers. It has also allowed buyers who did not have the present savings for a down payment to move their future home purchase forward to today.

The artificially low mortgage rates have also dramatically increased the purchase power of your average buyer. Once rates rise again to historic averages (7-8%), purchasing power will drop and take home prices down with it.

Also, consider that foreclosure moratoriums have limited supply of "distressed" homes on the market. This has both reduced the supply of housing and shifted the mix of housing from distressed to non-distressed sellers - moving the negotiating power back towards the sellers.

The two government GSEs Fannie Mae and Freddie Mac, as well as FHA, are also funding everything under the sun, regardless of whether they have the reserves.

The point is that none of these practices are sustainable, and therefore the nascent recovery is not sustainable. Once the scaffolding supporting this market is removed then we will find out whether the housing prices remain at current levels or fall lower.

Also consider that the price-to-rent ratios are still too high in many areas of California - it remains far better to rent than to own in the more desirable neighborhoods. And the rental prices are falling rapidly due to the glut of underwater homes sitting vacant, unsalable at market prices.

Finally, the Case Shiller index, seasonally adjusted, or not, is a trailing indicator. It merely tells you where the market was two months ago. It's actually worse than that since July numbers are a three-month moving average of May, June and July data.

Leading indicators like delinquency rates, foreclosure rates, unemployment, and consumer sentiment are much more predictive of the economic state of future buyers and the state of distress for future sellers. And, by the way, these are all bad.

Sep 29 02:27 PM

[Faisal Humayun:]

Since the Dollar has also weakened in the past 4-5 months, one needs to analyze if the housing prices have gone up just in nominal terms or in real terms as well.

If the Government keeps supporting all Asset prices through quantitative easing, it is very likely that even housing prices would go up at one point of time. But it should ideally just go up in nominal terms. Not in real terms or against hard asset like Gold.

Sep 29 02:51 PM

[tunaman4u2:]

Russ, you are correct

Sep 29 02:55 PM

[Gedankonomist:]

The reason why "owning" a home is so expensive is because of easy credit. Given the opportunity to sell themselves into debt slavery so that they can "own" a home, most Americans say, "where do I sign?" So today, if you want to own a home, more often than not, you have to become a slave. This is because demand increases as credit available increases, and the increased demand drives up the price of homes. Take away the loans and the demand decreases, and so prices drop.

You can thank the FED and the federal government for easy credit an hence high home prices. Similarly, the federal government is responsible for high tuition prices, because of increased demand due to low-interest "school loans." The government and insurance companies can also be blamed on high medical costs, for similar reasons as well: Insured people demand more medical services than those who have to pay out-of-pocket, all other considerations held constant. So what the Obamatons in the media are suggesting seems kind of silly. The government is the poison that caused the "healthcare crisis," so how is it now the cure?

[I write "own" and "owner" in quotations because after all, you don't own your home. If you don't believe me, just stop paying your rent, ahem, I mean, property tax.]


On Sep 29 02:23 PM tunaman4u2 wrote:

> Keep housing unaffordable, require higher wages to support mortgage,
> companies choose cheaper labor overseas, decreased jobs & thus
> wages in US, homes become more unaffordable.
>
> Law on unintended consequences manipulating the price of everything
> the Fed will find

Sep 29 03:16 PM

[rick12345:]

People are not quite as stupid as some of you would make them out to be. Cashed up investors for example know a bargain when they see it, and believe me, this is a buyers market. The $8000 is already factored into the price, even before the home opens for inspection, so I don't know what difference if any that would make; If anything, buyers would be holding off their purchase in anticipation of further price reductions once the Governments' incentives finish.
Unfortunately, just like the rally in commodity prices as well as the stock market, perma-bears will again miss out on a great buying opportunity.

Sep 30 07:02 AM

[Marty Boardman:]

Affordability is what has been driving sales up, more so than the tax credit or low interest rates. At least that is the case where I live in Phoenix. An individual or family with a household income of $40,000 can afford a monthly mortgage payment of $800-$1000. With the median price at $125,000 it is easy to see why more people are buying. This also explains why investors are flocking to the Phoenix market. You can actually buy an investment property here and cash flow.

Sep 30 09:23 AM

[JAMES CARLINI:]

I am still skeptical. Anyone can buy a house - but can they count on having their job in the next 6 -12 months? Many of my friends are not confident about buying any big ticket item and just want to make sure they can afford what they already have.

I don't see a rush in buying condos or houses because no one is that sure of their job (in the private sector).

Solid jobs are key to a sustained recovery and no one is talking about opening up real jobs - with real salaries.

Underemployment is rampant and if you do not see this around you, you must not be looking too far.

Sep 30 09:57 AM