Home prices rise - but is it for real?

One home price index rose for the first time in three years Tuesday, but foreclosures still pose a hurdle to market stability.

By , Staff writer

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    A house for sale is listed as "contract pending" in Arlington, Virginia Tuesday. US home prices rose in May for the first time in three years, suggesting the housing market is stabilizing, but a weakening job market hit consumer confidence in July and could prevent near-term economic recovery.
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For the first time in three years, a widely watched index of US housing prices went up Tuesday. The report is welcome news for homeowners and the economy, but it doesn’t necessarily signal the end of America's housing downturn.

The Standard & Poor's Case-Shiller Home Price Index for 20 major cities rose 0.5 percent in May from its level in April. That was the first rise in this index since July 2006, and comes alongside other data suggesting progress in one of the economy's key trouble spots.

The volume of home sales is also rising, according to data collected by the National Association of Realtors (NAR). Moreover, alternative home price indexes from the NAR and the Federal Housing Finance Agency also show a recent uptrend in prices.

Recommended: Top 10 places to buy a foreclosed home

It may be a while, however, before home prices start upward for good.

That's the conclusion of some forecasters, who point to a still-high inventory of unsold homes and a potentially rising level of foreclosures.

"At long last, the downturn in the US residential real estate market may be drawing to a close," economist Jan Hatzius at Goldman Sachs said in a report last week. But "our baseline expectation remains that the Case-Shiller index will fall 40 to 45 percent from peak to trough, which implies another 10 percent drop."

He expects that additional drop to occur between now and the first half of next year.

Not everyone thinks home prices will keep falling. And even if they do, the drop would be smaller than the 17 percent decline in the Case-Shiller index over the past year.

Stabilization in home prices would help the economy in several ways. It would make millions of home-owning households feel less financially vulnerable, buoying consumer confidence. It could also help mitigate bank losses on foreclosures – in part by making some households less likely to default on loans.

Here's a run-down on the recent improvement in housing, and why more progress is needed.

What's going well:

• The level of housing market activity is improving as homes become more affordable. Sales rose in June even as the number of post-foreclosure sales declined. Foreclosure sales were 31 percent of sales in June, down from 45 to 50 percent of housing transactions earlier in the year, according to Goldman Sachs.

•The trend of plunging home prices may be over. For four months in a row now, the Case-Shiller index has shown a slowing in the rate of home-price declines, when measured on a year-over-year basis.

• The improvements span all regions. In the 20 cities tracked by Case-Shiller, 15 showed a rise in prices for April. Only Las Vegas, Phoenix, and Miami showed declines of more than 0.3 percent for the month.

Hurdles that still lie ahead:

• An excess supply of homes persists. Even with the pickup in sales volume, Goldman Sachs estimates the stock of homes for sale now at 3.66 million, well above the levels of 2 million or so seen earlier this decade.

• The foreclosure wave isn't over, and many analysts don't expect it to level off until 2011, because of rising unemployment and the upward reset of many adjustable mortgage rates.

• Homeownership rates have been falling (due largely to foreclosures), but remain above the long-term norm. The rise in ownership levels to historic highs during the past decade was fueled by progressively easier access to credit. Hatzius concludes that "unless households' access to credit recovers sharply, homeownership might well continue to decline in coming years, which would weigh further on the demand for single-family homes."

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