Home Prices Are Stabilizing

Includes: FMCC, FNMA
by: Markos Kaminis

Data reported over the last two weeks offered yet more positive signals for real estate investors. Both the FHFA and Standard & Poor’s real estate pricing metrics have now illustrated positive changes in average home prices in April.

Last week, the FHFA House Price Index produced its first monthly increase since May 2010. The index, which measures only the prices of homes backing mortgages that have been sold to or are guaranteed by Fannie Mae (OTC: FNMA.OB) or Freddie Mac (OTC: FMCC.OB), rose 0.8% on a seasonally adjusted basis from March to April. Of course, residential real estate prices were still 5.7% lower than April of 2010, and benefited from the first-time homebuyer tax break.

This week, the S&P Case Shiller Home Price Index also showed pricing strength for April. Both Case Shiller’s 10-City and 20-City Composite Indexes posted their first monthly increases in eight months. Shiller’s 10-City Composite, which is inclusive of the ten most important metropolitan statistical areas [MSAs] in the U.S., improved by 0.8% in April over March. Shiller’s 20-City measure gained 0.7% against the prior month. Just like with the FHFA data, year-to-year comparisons still reflect relative weakness largely due to last year’s tax-incentive driven market strength. On a yearly basis, the 10-City Composite was 3.1% short of last year’s mark, while the 20-City measure was down 4.0%.

Housing markets are of course varied and regional, and so the broader measures cover and conceal regional variation. The FHFA data showed regional strength in New England, which is defined by the FHFA as the states of Maine, New Hampshire, Vermont, Massachusetts, Rhode Island and Connecticut. The FHFA’s New England accounting showed 2.2% improvement in April. Meanwhile, the FHFA’s Mountain Division, which includes Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona and New Mexico, marked a 1.3% decrease in April.

Case Shiller’s data showed that while 13 of 20 MSAs experienced price increase, 6 of 20 MSAs still experienced month-over-month price decline in April; those cities included Charlotte, Chicago, Detroit, Las Vegas, Miami and Tampa. According to Case Shiller, Washington D.C. continues to shine, showing a 3.0% monthly price increase and 4.0% annual improvement. Cleveland, Detroit and Las Vegas are the three markets where average home prices are lower now than they were in 2000. Phoenix and Atlanta are close to their 2000 price points.

March had just marked a new crisis low, according to S&P. An economist at the company suggested not buying too deeply into the month’s move, while noting seasonal spring strength in other housing data points through May. FHFA’s data is seasonally adjusted though. The S&P representative also reminded readers of the Home Price Index report that bank lending remained tight, but he notes a slight decline in consumer credit defaults, based on S&P data.

According to the S&P report, average home prices across America were relatively similar to those found in the summer of 2003. Also, the peak-to-current price difference for the 10-City and 20-City Composites were -32.6% and -32.8%, with the peak found in June/July 2006. FHFA shows its U.S. Index is 19.3% below its April 2007 peak, and roughly at its January 2004 level.

The price charts seem to show the market about where it should be, in my opinion. While the rainiest April on record; a hard time for tornado alley; the deep flooding of the middle/south of the country; and Libyan conflict led gasoline prices - contained spring activity, comparable annual home sales rates going forward are modest, and so the second half of the year offers some opportunity for annualized home sales growth. Thus, with a shift to an inventory consuming environment, and given the adequate degree of price decline to now, I see reason enough to look for pricing stabilization over the next few months in real estate, if the bottom was not just marked in March. Of course, any new catastrophe undermines everything.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.