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Analysis

U.S. Home Prices: Signs of the Dreaded Double Dip?

By Prajakta Bhide and Christian Menegatti

EXECUTIVE SUMMARY

Recent housing data reports are consistent with our predictions for a double dip in home prices. Prices were expected to stabilize temporarily but fall as government support is phased out. Positive data in the run-up to the expiration of the extended homebuyer tax credit may push home prices higher over the coming months, but fundamentals indicate that a sustainable pick-up is unlikely. Additionally, vacancies, foreclosure rates and mortgage rates deserve careful attention, as they are expected to exert further downward pressure on struggling prices.

In a recent blog post, we pointed out the odd streak of monthly gains in the seasonally adjusted home price data from S&P, which is in contrast to a sustained string of losses in the unadjusted data series and, more importantly, the outright declines in seasonally adjusted prices shown by the FHFA and the LoanPerformance price indexes.  

Figure 1: U.S. Home Price Index
U.S. Home Price Index
Source: Bloomberg, S&P

According to an April 27, 2010, report, the S&P/Case-Shiller 20-City Composite Index of home prices fell by 0.1% m/m on a seasonally adjusted basis in February 2010, the first decline following eight consecutive months of gains that began in June 2009. On a seasonally unadjusted basis, prices fell 0.8%, the fifth consecutive decline. And sure enough, on April 20, 2010, the S&P/Case-Shiller Index Committee issued a statement that said, “After reviewing the data, the S&P/Case-Shiller Home Price Index Committee believes that, for the present, the unadjusted series is a more reliable indicator and, thus, reports should focus on the year-over-year changes where seasonal shifts are not a factor. Additionally, if monthly changes are considered, the unadjusted series should be used.”

Figure 2: S&P/Case-Shiller Seasonally versus Non-Seasonally Adjusted
Figure 2: S&P/Case-Shiller Seasonally versus Non-Seasonally Adjusted
Source: Bloomberg, S&P

On a positive note, the April 27 report showed a year-over-year gain in the 20-city composite index in February 2010, its first such gain since December 2006. However, while on an annual basis, home prices were higher in 18 of the 20 cities, 19 cities saw lower prices in February than in January, a number that has been steadily rising since June 2009. Moreover, home prices touched new lows in six cities: Charlotte, Las Vegas, New York, Portland, Seattle and Tampa.

Like the S&P/Case-Shiller Index, First American CoreLogic’s LoanPerformance Index showed its first year-over-year gain in February. However, on a monthly basis, the index showed an accelerated decline in home prices, with prices falling 2% m/m in February after falling 1.6% m/m in January 2010. The FHFA home price index weakened for the third consecutive month, down 0.2% m/m in February, following a 0.6% decline in January and a sharp 1.9% m/m decline in December 2009, which erased gains from the previous months.

The reports dovetail with our forecasts for a double dip in home prices. Our research highlighted that home prices were expected to stabilize temporarily; however, as government support to the housing sector was phased out (particularly, the first time homebuyer tax credit, originally scheduled to expire in late November 2009) home prices would further correct downward. We also argued last year that the momentum produced by tax credits would lose steam over time and price gains would shrink and reverse, turning into price losses for 2010. The monthly declines currently visible are likely to be the outcome of these dynamics. Additionally, a pickup in the pace of foreclosure activity may also have begun to push home prices lower in recent months.

What Can We Expect over the Coming Months?

Housing market data have been generally stronger in March 2010 than in February, as was expected nearing the extended deadline for the homebuyer tax credit. Existing home sales improved 6.8% m/m in March, while new home sales, bouncing off extremely depressed levels, jumped 27% m/m. However, new home sales remain a substantial 70.4% below the peak level of July 2005. Also, on closer inspection, the report shows more unsavory details: The median time between the completion and sale of a home remained at a record high of 14.4 months, and despite the jump in sales, the median sales price fell by 3.4% m/m in March, while the average price fell by a sharp 11.1% m/m.  

Nonetheless, the positive data may push home prices higher over the coming months, as pointed out by David M. Blitzer, chairman of the S&P Index Committee in the April 27, 2010, report. However, despite this boost, a sustainable gain in U.S. home prices seems unlikely and is certainly not indicated by fundamentals. A quarterly report by the Census Bureau shows that while vacant homes for sale continue to correct downward, they are still historically elevated, as are vacant homes for rent.  Also, the already high number of vacant homes being held off the market rose to 5.4% in Q1 2010, from 5.2% in Q4 2009.  

Figure 3: Vacant Homes for Sale as a Share of the Total Housing Stock
Vacant Homes for Sale as a Share of the Total Housing Stock
Source: U.S. Census Bureau and RGE Computations

These inventories, which will be slowly absorbed into the market, will continue to have a dampening effect on prices. (See: Housing Starts: No Reason to Expect a Strong Recovery in 2010)  There may be some evidence of the so called “shadow inventory” finally beginning to make its presence felt in the market. Recent reports show a pickup in distressed sales. A First American CoreLogic report noted a rise in foreclosures and real-estate-owned (REO) sales in early 2010; at 29% of all sales in January 2010, distressed sales were at their highest level since April 2009. RealtyTrac’s report on foreclosure activity in March 2010 noted, “Lenders are starting to make a dent in the backlog of distressed inventory that has built up over the last year as foreclosure prevention programs and processing delays slowed down the normal foreclosure timeline.”

In addition to these factors, a key element that has been boosting housing affordability—the Fed’s Mortgage Backed Securities (MBS) purchase program—ended in Q1 2010. There is not yet evidence of a sharp jump in mortgage rates following the termination of the program, though 30-year conventional mortgage rates rose above the psychologically important 5% mark in April. However, several analysts expect an eventual rise in mortgage rates, by 30 to 50 basis points, as the effects of the MBS purchase program unravel. Mortgage rates merit close attention, as a climb in rates will put downward pressure on housing demand, just as the housing market struggles to find its feet.

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