Blog

It’s a Big W: Case-Shiller Housing Numbers Improve; WSJ Strikes Right Note of Caution

Home prices in major U.S. cities rose for the second straight month in June in the latest sign the housing market may be steadying after years of declines.

The S&P/Case-Shiller index for home prices in 20 major cities in the three months ended June 30 was up 1.4% from its level in the three months ended May 31. It was the first time the index rose two months in a row since mid-2006. Prices gained in 18 of 20 markets, but were still down 31% from their July 2006 peak.

“Momentum matters,” said Robert Shiller, the Yale University economist who helped create the index. “This is a sudden break in momentum.”

The hint of improvement in housing and the broader economy was underscored in a separate report Tuesday showing consumer attitudes improved in August after two months of decline. The Conference Board’s consumer-confidence index rose to a level of 54.1 in August, just shy of the 54.8 level reached in May.

One component of the index, consumer expectations of where the economy will be in six months, rose to 75.8, its highest since the recession began in December 2007. Consumers’ assessment of present conditions also improved, along with stepped-up plans for buying homes, autos and several major appliances.

Economists and real-estate professionals warn that a recovery in housing is likely to be bumpy: Home prices could drop again as job losses drive foreclosures higher. “It really is too soon to call this as a turning point,” Mr. Shiller said, recalling a slowdown in price declines in early 2008 before the deteriorating economy sent housing back into a tailspin.

A narrower Case-Shiller index of home prices in 10 major metropolitan areas is down 15.1% for the last 12 months and down 5.5% so far this year. Government officials used that measure when modeling their assumptions for stress tests to gauge the health of U.S. banks earlier this year. Under a baseline scenario, officials predicted declines of 14% for 2009, while an adverse scenario forecast a 22% drop.

A separate price gauge calculated by the Federal Housing Finance Agency, which uses sales price information on mortgages owned or backed by government-backed mortgage investors Fannie Mae or Freddie Mac, showed that prices increased 0.5% in June from May.

Meanwhile, sales of existing single-family homes in California increased 12% in July from the same time a year ago, the California Association of Realtors said.

Recent home-price gains have been driven, in part, by competition between first-time buyers and investors offering to pay cash for distressed properties. Demand also has been boosted by government intervention that helped drive mortgage rates to half-century lows in the spring and a tax credit of up to $8,000 for first-time home buyers.

Stefan Nissen, a 34-year-old emergency-room nurse, and his wife, a schoolteacher, are buying a three-bedroom home in Novato, Calif., a San Francisco suburb. The home is selling for around $500,000 in a short sale — a transaction in which the sales price falls short of the mortgage balance owed by the seller. “We actually looked to buy two years ago and could not get into anything in the area,” said Mr. Nissen.

A for-sale sign in Des Moines, Iowa, on Friday. An index of home prices in 20 U.S. cities was up 1.4% in the three months ended in June.

Still, headwinds remain. Mortgage defaults and foreclosures aren’t likely to peak until unemployment ebbs. The rate of 90-day delinquencies on loans owned or guaranteed by Freddie Mac rose to nearly 3% in July from 2.8% in June and 1% in July 2008. While rising demand has helped soak up foreclosure inventory in several hard-hit markets, rising mortgage defaults have fueled concerns among real-estate professionals that the supply of new foreclosures could jump later this year.

“The government has not yet handled the foreclosure problem,” said Mr. Shiller. The success of efforts to stave off foreclosures by modifying mortgages and the firming of demand for homes will determine whether the gains in home prices last.

Las Vegas and Detroit were the only markets that saw monthly price declines in June. Home prices in Las Vegas have dropped by 54.3% from the August 2006 peak, moving ahead of Phoenix, which is down by 53.9% from its June 2006 peak.

Source: Home Prices in Major U.S. Cities Rise for a Second Month, Nick Timiraos, Wall Street Journal, 8/26/09

Comment: The Wall Street Journal tempers any undue optimism: further job losses and foreclosures will undo the improvements in the Case-Shiller numbers, assuming they are accurate and comprehensive. The New York Times, which was prominent in beating the drums warning about the impending real estate bubble, was surprisingly exuberant in reporting this story.  NYT quotes Karl Case: “When I saw these numbers, I danced a jig,” said Karl E. Case, a co-developer of the index and an economics professor at Wellesley College. “It appears that the housing market is stabilizing quicker than people thought it would.” NYT waits until the last three paragraphs of its story for its on-the-other-hand cautionary note. WSJ, on the other hand, references Shiller’s caution up front in concluding that we’re out of the woods just yet.

If unemployment numbers continue to kiss 10% for adult men, and foreclosures continue as more properties’ values go underwater, we’re probably not on the upslope of a V-shaped recovery. We’re probably approaching a Roubini-esque Big W.

In the words of Smiler Grogan, it’s a Big W, I tell ya.