The Wall Street Journal

24 July  2012

Home prices in the second quarter rose from the year-ago period for the first time since 2007, according to a closely watched index, the latest indication the housing market is starting to recover.

The report, which is scheduled to be released Tuesday by real-estate firm Zillow Inc., found that for the quarter ending in June, home values were up 0.2% from the same period in 2011.

While other indicators have shown home prices turning up since the spring, most examined short-term changes from one month to the next. Other indexes reported gains in median sales prices, which can be skewed based on the type of homes that are sold. But Zillow measures prices of comparable homes in the same community, which some economists say provides a truer picture of market trends.

Nearly one-third of the 167 metropolitan areas tracked by Zillow posted annual price increases for the second quarter compared with the year-ago period. Prices rose fastest in cities with fewer homes for sale and strong investor demand. Phoenix prices rose 12% from one year ago while Miami was up 6%.

“It seems clear that the country has hit a bottom in home values,” said Stan Humphries, Zillow’s chief economist, who had previously forecast that housing wouldn’t hit bottom until late this year or early in 2013. The fact that the gains came during a period in which the economy wasn’t very strong suggests “there’s some fundamental organic strength to the housing market,” Mr. Humphries said.

The modest uptick in demand is pushing prices higher because the supply of homes for sale has fallen sharply. This has created unexpected problems for owners like Peter Jones, who is set to close on the sale of his four-bedroom house in Tampa, Fla. on Friday. The good news is that he is getting nearly $75,000 more than he paid for the home two years ago. The bad news: It sold faster than he expected and he hasn’t been able to find another place to buy.

“I’m under the gun,” said Mr. Jones, 31. He has made offers on two waterfront homes in nearby St. Petersburg listed as short sales, where the bank must agree to accept a loss. “Now is the time to do it,” said Mr. Jones. “In a year or two, the houses are just going to be more expensive.”

According to Zillow, prices climbed 2.1% from the first quarter to the second, the largest such gain since the end of 2005.

The Wall Street Journal’s quarterly survey of housing-market conditions in 28 U.S. metropolitan areas shows that inventories of unsold homes have fallen in every market and are down by more than 20% in two-thirds of those markets.

Housing inventories are falling for several reasons. Banks have listed fewer foreclosed properties for sale as they have modified more troubled loans and approved more short sales. Foreclosure listings are down by 23% from one year ago to their lowest level since October 2009, according to research firm Zelman & Associates. Some investors are renting out those foreclosures, rather than flipping them for a profit, which also is putting a lid on inventories.

But the biggest force behind reduced inventories are owners who don’t want to sell.

“You have people electing not to list in this environment … because they think they can get a good price if they wait a little while,” said Richard Smith, chief executive of Realogy Corp., which owns the Coldwell Banker and Century 21 real-estate brands.

Nick Kasun opted against listing his home in May when his real estate agent refused to list it at anything above $437,000, even though Mr. Kasun believes his four-bedroom Spotsylvania, Va., house is worth $490,000. The agent “had a price she wouldn’t budge from, and we went around and around for some time,” Mr. Kasun said.

Few economists are predicting a strong recovery because many households have too much debt to qualify for a mortgage. Also, there is a large “shadow supply” of more than 3 million mortgaged properties in some stage of foreclosure or serious delinquency that haven’t been taken back by lenders.

But the biggest worry for now is that the economy isn’t adding enough jobs. A rise in foreclosures isn’t “as worrisome as what would happen if the economy slowed really sharply. That would be bad,” said Thomas Lawler, an independent housing economist in Leesburg, Va.

According to Zillow, markets with the biggest declines between the second quarters of 2011 and 2012 included Atlanta, where values were down by 6%, and Chicago, down 5%. Both cities have had weak demand and a glut of homes.