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Behind the Numbers: Does Case-Shiller Show a Market Bottoming Out?

Monday, May 28, 2012

Tuesday’s S&P/Case-Shiller home-price indexes show a market in which U.S. home prices are still falling, but not as dramatically as in previous months. This is good news for homeowners and home sellers since it indicates that the market is bottoming out. It’s also a sign that the housing downturn, now in its fifth year, may be approaching the end.

Nationally, the average sale price of a single-family home fell 1.9% from a year ago, which economists are calling effectively flat. Some markets, including Phoenix, showed major growth in prices, while five of them — Atlanta, Chicago, Las Vegas, New York and Portland — fell to new post-financial crisis lows.

Analysts took the news that the Case-Shiller indices, which trail the market by three months, are finally coming around to the fact that the market, generally speaking, is at or near bottom. They remain divided, however, on whether we are likely to see continued improvement in the short term. Here’s what some of them have to say:

Stuart Hoffman, chief economist, PNC Financial Services Group: “The housing market is turning around. The big decline in house prices is now over, although prices could see small drops in the near term as more foreclosures hit the market following the agreement earlier this year between the big mortgage servicers, state attorneys general and the Obama administration. Better fundamentals are supporting the improving housing market. Affordability is very high given the price drops and extremely low mortgage rates. Although credit is still tight, it is loosening somewhat. Demand is strengthening with the better labor market and improving consumer confidence…It is notable that the biggest gains were in Phoenix and Miami, two areas that had the biggest price drops during the housing bust (peak-to-trough declines of 56 percent and 51 percent, respectively). In both areas prices are up over the past year. Housing in these areas is now much more affordable than prior to the bust, leading to investor purchases as well as sales to first-time homebuyers and households looking to trade up.”

Patrick Newport and Michelle Valverde, U.S. economists, IHS Global Insight: “Are home prices still looking for a bottom, as the Case-Shiller 10 and 20-city composite indices imply, or are they stabilizing, as the Federal Housing Finance Agency numbers indicate? It depends in where you are. Housing prices are still mainly driven by local forces such as job growth and the neighborhood foreclosure rate. Still, in most cities, home prices appear to be stabilizing…Our view is that foreclosures, excess supply, and weak demand will drive home prices as measured by the Case-Shiller indices down a bit further, but that a bottom is in sight.”

Ed Stansfield, chief property economist, Capital Economics: “U.S. house prices have now found a floor… Admittedly, the euro-zone crisis poses a major downside risk and there are some signs that the economic recovery has lost some momentum. Nevertheless, the improvement in credit appetite among both households and businesses, as well as the increasingly broad-based nature of the recovery, offer some cause for cautious optimism. For now, we continue to expect any upturn to be modest. And given the likelihood that the divergence between city-level performances will remain high, further house price gains may well be interspersed by the occasional reverse. But unlike the experience of 2009, then temporary tax credits prompted a modest but short-lived rise, we do think that this house recovery will last the course.”

Tom Lawler, independent housing analyst: “As I’ve done before, in discussing the seasonally adjusted data I put ‘seasonally’ in quotes, as there have substantial changes in the purported ‘seasonal’ pattern of home prices since the housing market cratered. The reason, of course, is that there is a marked ‘seasonal’ in the distressed-sales share of home sales, which peaks in the late winter months and hits a trough in the summer months. Not coincidentally, the ‘shift’ in the ‘seasonal’ pattern of home prices has been one where home prices are ‘seasonally’ much weaker than they used to be in late winter, and ‘seasonally’ much stronger than they used to be in the summer.” Taking this into account, Mr. Lawler writes that there is a “better-than-even chance” that the Case-Shiller numbers will show an increase next quarter.

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