Home Prices Continue to Rise - Analyst Blog

This morning the S&P Case-Schiller index was released. The Composite 20 index (C-20), which covers 20 of the largest metropolitan areas in the country rose by 0.27% on a seasonally adjusted basis (home prices are seasonal, so the adjusted data is what you should be looking at — most of the press makes a mistake by focusing on the unadjusted data, thus these figures might vary from what you read elsewhere). That was the fourth straight increase. The Composite 10 (C-10) index, which is a subset of the Composite 20, but which has a longer history, posted a 0.36% increase for the month.

On a year over year basis, the C-20 is down by 9.39% while the C-10 is down 8.53%. While it was an increase, it was a smaller one than was expected. The consensus of economists was looking for a C-20 year-over-year decline of just 9.10%. The data is for September, not October like most of the data that has come out recently.

The country was roughly split between areas where home prices increased during the month and areas where housing values continue to decline. Eleven metropolitan areas posted increases and nine suffered declines. Some of the areas with the biggest increases in home prices were a bit of a surprise.

In California, San Francisco saw the largest monthly increase of any city, enjoying a 1.71% rise. It was one of the areas that was considered “bubble central,” but has started to stage a comeback. Over the last year, prices in the City by the Bay are down 7.85%. Similarly, San Diego posted a 1.05% increase for the month, and it is now down just 5.72% year over year. Long-depressed Detroit saw prices increase by 1.25% for the month, although on a year-over-year basis, home prices are still down by 19.26%. The other areas that saw monthly increases of over 1.0% were the Twin Cities, up 1.31%, and Chicago, up 1.11%.

On the negative side, the worst-hit city was Cleveland, which was down 1.20% for the month, although it is actually among the healthiest cities on a year-over-year basis with home prices down just 3.880%. Then again, the housing bubble was not centered on the beaches of Lake Erie, it was centered on the beaches of Southern California and Florida.

Las Vegas, which is the city that has been hit the hardest by falling home prices overall, continued to see prices fall, down another 1.19% for the month, and off 28.63% from a year ago. From the peak, home prices are down 55.4%. The only other city that comes close, to that cumulative decline is Phoenix, down 52.0%.

Also keep in mind that the home price declines had lasted for far more than just a year. The graph below (from http://www.calculatedriskblog.com/) shows the cumulative decline from the peak pricing, which was hit in April of 2006 for both of the composite indexes, but is shown in the graph from each individual city peak. It breaks down the cumulative decline by time period, with the blue bar showing how much home prices fell through the end of 2007, yellow showing where things stood at the end of 2008, and blue indicating how far the city is now off its peak. Thus if the orange bar is shorter than the yellow bar, it means that city has actually seen home prices rise so far this year.

It is encouraging to see home prices rise. If this continues, some of the people in underwater houses (meaning with a mortgage more than the value of the house) might just see the flood recede and regain some positive equity in the house. This would greatly reduce the number of foreclosures in the future. It would make it an economically rational thing for people to pay their mortgages again. As it stands today in big areas of the country, it isn’t.

As a result, mortgage delinquencies have been skyrocketing, and eventually those delinquencies will lead to foreclosures. That could reignite a vicious circle, where the foreclosed houses flood the market, once again depressing prices, which causes more people to think there are better places to put their money than paying their mortgages.

Rising home prices have the potential to turn that into a virtuous cycle. To the extent that happens, it has very positive implications for the entire mortgage complex, from the big banks like Bank of America (BAC) to the mortgage insurance firms like MGIC (MTG) to the wards of the state, Fannie (FNM) and Freddie (FRE).

However, I fear that the increase in home prices is only temporary. That it is the product of extraordinary government efforts to prop up home prices, and that those efforts can not be sustained forever. These include the tax credit (recently expanded to include move up buyers), which is scheduled to end at the end of April, and the Fed’s program of buying up $1.25 Trillion in mortgage-backed paper to manipulate mortgage rates lower. They should finish up their purchases by the end of March.

The FHA has also played a huge role in propping up the market, making far more loans than it ever has before, and only requiring down-payments of 3.5%. People can even use the tax credit for their down-payment. The FHA’s reserves are already dangerously low, and the delinquencies on the loans they insure are skyrocketing, particularly for mortgages it issued in 2007 and 2008. This year’s loans have not really had time to go bad yet. The FHA may end up going the way of Fannie and Freddie and require a massive federal bailout.

All in all, the increase in home prices is good news, but it is coming with a big price from the Federal Treasury and may end up being ephemeral. The risk of a renewed downturn in the second quarter of 2010 is very big. If that were to occur, it would mean more pain for the mortgage complex.