April 1, 2010
A national index of home prices rose unexpectedly in January 2010, with California cities posting strong gains, but some experts warned that the nation’s struggling housing market could be headed for another dip.
The closely watched Standard & Poor’s/Case-Shiller index of 20 metropolitan areas rose 0.3% from December on a seasonally adjusted basis. That marked eight consecutive months of home values improving or at least holding steady.
The index also was down 0.7% from the same month last year, the nearest that the year-over-year reading has come to positive territory in three years.
But expectations about housing’s direction remain mixed as a series of government initiatives intended to bolster sales and stabilize values begin to expire.
Concern over a potential new wave of foreclosures also remains high despite new efforts by the Obama administration to keep struggling borrowers in their homes. “Going forward, forces that will bring home prices back down are mounting,” said Patrick Newport, an economist for IHS Global Insight. “Our view is that despite this report, prices have further to fall—about another 5%.”
The Case-Shiller index, which covers three months of data, was influenced by a sales surge in November when buyers rushed to take advantage of a federal tax credit for first-time purchases before its initial expiration. Sales fell in December and January, even though that program was expanded and extended through April. Although many economists expect the extended tax credit to give sales a further boost, they also expect another fall once the government incentive ends.
“It is way too early for this market to have rebounded the way it has,” said Christopher Thornberg, principal of Beacon Economics.
A breakdown of the index showed mixed results with 12 cities posting increases and the rest decreases. When left unadjusted for seasonal variations, the 20-city index fell 0.4%.
Economists surveyed by Bloomberg had expected the index to fall in January.
David M. Blitzer, chairman of S&P’s index committee, said he was concerned with the slow construction of new homes, falling sales volumes and a potential wave of new foreclosures hitting the market this year. “We can’t say we’re out of the woods yet,” Blitzer said.
But others saw the improvements as a sign that the economic recovery was beginning to help consumers gain confidence. “What people are seeing in the stock market, and what people are feeling, is the beginning of a real recovery,” said Karl E. Case, a professor at Wellesley College and co-creator of the index.
“Now that the economy is starting to come back, I think the psychology has changed,” Case said.
California cities posted solid gains with the Los Angeles metropolitan area up 1.8% to lead the index. San Diego gained 0.9%, and San Francisco rose 0.6%. Richard Green, director of the University of Southern California Lusk Center for Real Estate, said Southern California is showing strength because it was one of the earliest markets to get hit and is rebounding now before other areas. “We fell first, we fell deeply and we didn’t overbuild the way other parts of the country did,” he said. “And if you look at the long-term horizon, the amount of housing built relative to population was less than other places, and it is still really hard to build new houses here,” he said. That means the chances of recovering sooner are good, Green said.
Thornberg attributed the gains primarily to federal government programs and said most of Southern California’s housing gains are a result of fewer foreclosure properties on the market. The falling number of available foreclosures is pushing prices up on lower-end housing, though home prices continue to fall in pricier neighborhoods. “The bottom has been surging up,” Thornberg said. “It really is about the low-end.”
Chicago fell the most—0.8%. Others losing ground included Seattle, Atlanta and Denver. The housing market is likely to be affected soon by the expiration of certain government policies. The Federal Reserve plans to end its $1.25-trillion mortgage-bond-purchase program in the next few days. The program, which has kept interest rates at rock-bottom levels, has helped the Fed buy nearly all the mortgage bonds from housing finance giants Fannie Mae and Freddie Mac, replacing most private investors last year.
At the end of April, the federal tax credit program for first-time buyers and for some current homeowners is scheduled to expire. The program provided up to $8,000 to first-time buyers and up to $6,500 to certain current homeowners.
Also, the Federal Housing Administration, which has stepped up its support of low-interest mortgages for first-time buyers, is tightening its lending standards.
Many economists also remained concerned about a potential wave of foreclosures swamping the market in coming years as borrowers who owe more on their homes default.
The Obama administration late last week unveiled new measures at getting lenders to reduce the principal balances on problem mortgages and refinance underwater homeowners. Experts remain skeptical about whether the changes to the $75 billion Home Affordable Modification Program will help the program reach its goal of keeping 3 million to 4 million homes out of foreclosure through 2012.