Economists See More Home Price Declines Ahead
Luke Mullins

 

Real estate values increased slightly but are expected to dip in the coming months

Although home prices increased slightly in June, economists warn that real estate values appear to be headed for fresh declines.

Home prices in 20 major metropolitan areas inched 1 percent higher from May to June on a non seasonally adjusted basis, according to the S&P/Case-Shiller home-price report. But David Blitzer, the chairman of the Index Committee at Standard & Poor's, attached a note of caution to the optimistic looking figures. "While the numbers are upbeat, other more recent data on home sales and mortgages point to fewer gains ahead," Blitzer said in a statement accompanying the release.

Although the data are published monthly, the closely followed S&P/Case-Shiller indices are actually three-month moving averages. June's figures represent sales from April, May, and June. But prices during this period were boosted by a pair of short-lived factors. First, home sales typically increase during the spring and early summer because families want to settle into their new properties before the school year begins. And perhaps more importantly, housing demand was artificially stoked during this period by a federal tax perk that has since expired.

In an effort to arrest the decline in real estate prices, the Obama administration began offering tax credits worth up to $8,000 to qualified home buyers who signed a sales contract by April 30 and closed the transaction by June 30. (The closing deadline was later extended to the end of September.) The legislation, however, triggered a "pull-forward" effect on demand, as consumers who would otherwise have bought property in later months made their purchase sooner to qualify for the credit. The program succeeded in juicing home sales in the run-up to the original closing deadline only by siphoning off demand from the following months.

As a result, transaction volumes have plummeted in the months since the tax credit expired. Existing home sales in July fell 27 percent from the previous month, while new homes sales slumped to their lowest levels in nearly half a century. "The Mortgage Bankers Association's Purchases Index, which covers activity through August 20, indicates that home sales in August will be just as bad as they were in July," Patrick Newport, an economist at IHS Global Insight, said in a report.

Economists expect weakness is sales to drag the S&P/Case-Shiller indices lower in the coming months. "Price declines are now more or less inevitable," Ian Shepherdson of High Frequency Economics said in a report. "A further small increase in July is possible but we expect sharp declines beginning in August."

The most recent S&P/Case-Shiller report shows price increases are already losing steam. Home prices in 20 major cities, for example, increased 4.2 percent in June from a year earlier. That's less than the 4.6 percent annual gain posted in May. "The worry starts when you remember that the Homebuyers' Tax Credit has expired, foreclosures are still at high levels, and July data on home sales and starts were very, very weak," Blitzer said in a statement. "The inventory of unsold homes and months' supply data were particularly troubling. If this relative weakness in demand continues, it will likely filter through to home prices in coming months."

Newport expects the S&P/Case-Shiller national home price index to fall as much as 8 percent before hitting bottom next year.

 

 

Economists See More Home Price Declines Ahead

 

(c) 2010 U.S. News & World Report