Home Prices Show Gains for Second Month in Row

By NICK TIMIRAOS and KELLY EVANS, August 25th, 2009 - Wall Street Journal
Home prices in major U.S. cities increased for the second-straight month in June, the latest sign housing markets may be bouncing along a bottom after years of declines.

The S&P/Case-Shiller index measure of home prices in 20 major cities in the three months ended June 30 was up 1.4% from the level in the three months ended May 31. Prices gained in 18 of 20 markets. It was the first time the index rose two months in a row since mid-2006.

"Momentum matters," said Robert Shiller, the Yale University economist who helped create the index. "This is a sudden break in momentum."

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The hint of improvement in housing and the broader economy was underscored in a separate report Tuesday showing consumer attitudes improved in August after two months of decline. Consumer confidence rose to a level of 54.1 in August, just shy of the 54.8 level reached in May, according to a survey produced by the Conference Board, a New York-based business research group.

One component of the index, consumer expectations, rose to 75.8, its highest since the recession began in December 2007. Their assessment of present conditions also improved, and buying plans for autos, homes, and major appliances increased across the board.

Housing economists and real-estate professionals warn that the eventual recovery is likely to be bumpy and home prices could drop again as job losses drive foreclosures higher. "It really is too soon to call this as a turning point," Mr. Shiller said, recalling an improvement in prices in early 2008 before the deteriorating economy sent housing back into a tailspin.

Home prices are down 15.4% for the year ending in June, though that's an improvement over the 19.1% decline reported in the first quarter. Government officials used the Case-Shiller 10-city index when modeling their assumptions for stress tests used to gauge the health of U.S. banks earlier this year. Under a baseline scenario, officials predicted declines of 14% for 2009, while an adverse scenario forecast a 22% drop. So far, that index is down 15.1% for the last 12 months, and down 5.5% so far this year.

A separate price gauge calculated by the Federal Housing Finance Agency, which uses sales price information on mortgages owned or guaranteed by Fannie Mae or Freddie Mac, showed that home prices increased by 0.5% in June from May.

Recent home price gains have been driven, in part, by competition between first-time buyers and investors making all-cash bids for foreclosed properties. Demand also has been boosted by government intervention that helped drive mortgage rates to half-century lows in the spring and a tax credit of as much as $8,000 tax credit for first-time home buyers, set to expire Nov. 30.

Other headwinds remain. Mortgage defaults and foreclosures aren't likely to peak until unemployment ebbs. The rate of 90-day delinquencies on loans owned or guarantee by state-backed mortgage-finance company Freddie Mac rose to nearly 3% in July from 2.8% in June and 1% in July 2008.

While rising demand has helped soak up foreclosure inventory in several hard-hit markets, rising mortgage defaults have fueled concerns among real-estate professionals that the supply of new foreclosures could jump later this year. Efforts to stave off foreclosures by modifying mortgages could determine how many of those homes end up for sale. "The government has not yet handled the foreclosure problem," said Mr. Shiller.

Las Vegas and Detroit were the only markets that saw monthly declines in June. Home prices in Las Vegas have dropped by 32.4% over the past 12 months, moving ahead of Phoenix, which is down by 31.6% from one year ago. Only five markets have posted annual declines in the single digits: Dallas, Cleveland, Denver, Boston, and Charlotte, N.C.