Housing Perks Up

In a convincing sign that the worst housing slump of modern times is coming to an end, prices are starting to rise in nearly all of the nation’s large cities

The skyline looms over a development in Cleveland, where home prices rose 3.3 percent, seasonally adjusted, in June.
The trend, displayed in newly released data for June, is both pronounced and wide-ranging. It is affecting the high-priced coastal cities, with a 3.8 percent jump for the month in San Francisco and a 2.6 percent rise in Boston; the industrial Midwest, with Cleveland prices up 4.2 percent; and even the epicenter of the crash, the Sun Belt, with Phoenix homes up 1.1 percent. These numbers are not seasonally adjusted.

Eighteen of the 20 cities tracked by Standard & Poor’s Case-Shiller Home Price Index showed improvement in June, up from eight in May, four in April and only one in March.

“When I saw these numbers, I danced a jig,” said Karl E. Case, a co-developer of the index and an economics professor at Wellesley College. “It appears that the housing market is stabilizing quicker than people thought it would.”

Further confirmation that the market is recovering came in the Federal Housing Finance Agency’s house price index, which was also released Tuesday. It rose 0.5 percent in June after a revised increase of 0.6 percent in May.

The government index is based on price information from mortgages acquired by Fannie Mae and Freddie Mac, the government’s housing finance arms, which means it has fewer high-priced houses than Case-Shiller.

As recently as six months ago, there was widespread expectation that housing prices, which were already down nearly a third from their peaks, would tumble another 10 percent. That decline would most likely have prompted another round of foreclosures, perhaps helping to delay a recovery in the broader economy.

Now, said Mr. Case, it is likely such a grim event will be averted. “Banks will stabilize their balance sheets more quickly. The toxic paper will get written off more quickly,” he said. “That’s a big, big deal.”

The news comes on the heels of the National Association of Realtors’ report on July sales volume, which showed a 5 percent rise above the pace in July 2008. It was the first year-over-year gain since the market peaked in November 2005.

The improving real estate market is a combination of many factors: federal and local government assistance for first-time buyers, receding fears that an economic depression is at hand, low interest rates and, above all, cheaper prices than have been seen in many cities for a long time.

Jessi Havel, a library technician, and Ben Meyer, a university faculty assistant, love San Francisco but thought they were condemned to rent forever. Then friends pointed out that their $2,000 in rent would cover quite a bit of mortgage in a city where prices were back to where they were in mid-2000.

“It seemed like this was our one and only chance to buy here,” said Ms. Havel, 30. So in June they did, paying $456,000 for a cottage in the up-and-coming neighborhood of Mission Terrace.

Ms. Havel and Mr. Meyer benefited from a city loan program for first-time buyers. Ilse Cordoni, president of the San Francisco Association of Realtors, said such assistance, whether city, state or federal, was providing crucial support.

Loans insured by the Federal Housing Administration, originally designed for the working poor, used to be practically unknown in San Francisco, Ms. Cordoni said. Now they are popular, since they require only a 3 percent down payment.

“Government help is really helping,” she said.

For all the improvement reflected in the new Case-Shiller report, housing prices are still down sharply in comparison to last year’s figures. The increases reported on Tuesday show up when June’s transaction prices are compared with those of the month before. But when this June is compared with June of 2008, the 20-city composite index is still down 15.4 percent — an improvement from the 19.1 price decline of last winter. Average home prices are now at the level they were in early 2003.

The Case-Shiller index, the most closely watched home price index, is usually reported without any seasonal adjustments. Since home-buying traditionally is strongest in the spring, that prompted criticism with last month’s report that the long-awaited improvements were less hopeful than they seemed.

But even on a seasonally adjusted basis, the index was up 0.7 percent in June. It was the first such increase since May 2006. Instead of 18 cities increasing in June, on a seasonally adjusted basis only 15 did. The two best-performing cities, Cleveland and San Francisco, were up 3.3 percent and 3.1 percent respectively after adjusting.

Michael T. Darda, chief economist of MKM Partners, called the June report “highly encouraging.”

“The interaction between falling home prices with high household debt loads was the trigger point for the 2007-8 financial crisis, resulting in both the longest and deepest recession in postwar history,” he wrote in a research note. “Now, though, it would appear that the tide is turning.”

S.& P. also released on Tuesday the national Case-Shiller index, which covers a sample of homes across the country, including rural areas and smaller cities. That index increased 2.9 percent in the second quarter, indicating that the recovery extended beyond the urban centers. It was the first quarter-over-quarter increase in three years.

In the 20-city index, the New York metro area ranked far back in the pack, increasing only 0.4 percent in June. The two cities that declined were Detroit and Las Vegas, among the most economically troubled places in the country. Las Vegas prices are now down 54.3 percent from their peak. Detroit has fallen 45.3 percent.

After the back-to-back increases in the 20-city composite for May and June, there is little doubt that the market has picked up. The debate is now shifting to whether the upturn can be sustained.

Analysts note that some sales are probably due to a rush to buy in advance of the December expiration of an $8,000 first-time buyers’ tax credit. The National Association of Realtors is lobbying to have the credit extended or broadened, but neither is a sure thing.

“The tax credit may be shifting sales forward,” said Patrick Newport, United States economist for IHS Global Insight. “There are also unintended effects that could hurt the market. It’s stimulating construction, but we have too many homes already.”

Foreclosures are another big unknown. Prices were pushed down last year by an abundance of bank-owned properties hitting the market. This spring, fewer foreclosures have prompted bidding wars. But with unemployment nearing 10 percent, there are probably more foreclosures to come.
Published: August 25, 2009