Home Price Improvements May Be Short-Lived

Written by: David Lereah   Tue, October 27, 2009 Beyond Today’s News, Market Activity

Home prices rose for a fourth consecutive month in August according to a report released Tuesday.

Home values, as measured by the popular S&P Case-Shiller home price index of 20 cities rose a non-seasonally adjusted 1.2 percent in August compared to a month earlier. The monthly increase in the index was more modest than the 1.6 percent monthly increase posted in July. Home prices have risen for four consecutive months, increasing an accumulated 4.9 percent over the four-month period. The four-month steady improvement in home values indicates that the housing markets may be stabilizing.

Home prices were down 11.2 percent in August compared to August 2008. Although home values fell from a year ago, the rate of decrease was slower than the 13.3 percent annual decline registered in July. The Case-Shiller home price 20-city index has fallen 29.2 percent from its July, 2006 peak.

The home price report was welcomed news to the housing markets. The pace of annual decline in home values continues to decelerate. Even more encouraging is that there are sustained monthly increases across many of the markets.

The Case-Shiller home price index is considered a more accurate measure of home price changes compared to the National Association of Realtors median home prices which can be skewed by changes in the mix of homes sold during the period. The Case-Shiller index measures the change in sales price of a particular home to its price the last time it was sold.

The Case-Shiller 20-city home price index for August exceeded expectations of most market experts. A panel of industry experts surveyed by Briefing.com had forecast an 11.9 percent year over year price decline, compared to the reported 11.2 percent decline.

Home prices in August were up from July in 17 of the 20 metropolitan markets in the survey. Only Charlotte, Las Vegas and Cleveland experienced monthly declines in home prices. Las Vegas and Cleveland have been inundated with mounting foreclosures which could partially explain the monthly price drops. Home prices improved on an annual basis in 19 of the 20 metropolitan markets.

Home values have improved over the past several months because home sales have trended up and home inventories have trended down during the period. Historic low mortgage rates and a government tax credit program have provided a favorable backdrop for housing activity throughout this year.

Going forward, the nation’s housing sector faces several obstacles that could weaken future home sales and home values. The industry is expecting a new round of foreclosures and short sales over the next year due to rate resets on option ARM and interest only mortgage loans. Foreclosures usually sell at 15 to 20 percent discounts compared to traditional home sales. Housing activity continues to be hindered by monthly job losses; the unemployment rate reached a 26-year high last month. Further, recent momentum in home sales could stall if the $8,000 first time home buyer tax credit does not get extended in December.

Home price predictions vary across housing prognosticators due to market uncertainties and impediments. However, two prominent companies, Economy.com and Fiserv, project home prices will likely fall by another 8 to 11 percent by mid-year 2010.

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