The Case-Schiller composite index of housing prices in 20 major metropolitan areas rose 0.7% on a seasonally adjusted basis in June, following an essentially unchanged reading in May. The not-seasonally-adjusted numbers were even better (and what most of the press coverage were initially focused on). However, there is a distinct seasonal pattern to housing prices, so it is better to focus on the seasonally adjusted numbers.

The increase in prices was widespread, with 15 of the 20 areas seeing an increase — better than expected, and extremely good news. In May, nine of the 20 cities were up. The news is still tentative, with much of the good news coming from a reduction in supply as banks have been letting the foreclosure pipeline build, and an increase in demand from the first-time homebuyer tax credit, which expires at the end of November.

On a year-over-year basis, the composite 20 index was down 15.5%. The Composite 10 index, which has a longer history, was down 15.1% (also up 0.7% on a monthly basis).

All 20 metro areas are down on a year-over-year basis. Of course, the housing bubble did not pop a year ago — the decline has been going on a lot longer than that. The peak in both of the composite indexes was in May 2006. Since that time, the composite 20 index is down 31.5% and the composite 10 index is down 32.6%.

This has destroyed the wealth of most of the middle class and resulted in millions of people being underwater in their homes. When people are underwater on their homes, they are far more likely to stop paying on their mortgages than if they have equity in their homes. This, in turn, has led to massive (and still partially hidden due to very lax accounting rules) losses at the banks. This has depleted their capital and made it much more difficult to lend.

The collapse in housing values is probably the single most important factor in causing the world-wide economic decline. Signs that it is reversing are thus extremely important.

Not all areas have been equally affected by the bursting of the housing bubble. In two markets, Phoenix (-54.1%) and Las Vegas (-54.5%), prices have been more than cut in half since May 2006. In six other markets, Las Angeles, San Diego, San Francisco, Miami, Tampa and Detroit, prices are down by more than 40%. On the other hand, three markets, Dallas (-3.8%), Charlotte (-4.2%) and Denver (-9.4%) are down by less than 10%, and five more are down less than 20% from the nationwide peak (individual peaks varied by a few months).

Similarly, the increases over the last month have been very uneven. Five markets, surprisingly lead by Cleveland (3.3%) reported seasonally adjusted increases of 2.0% or more. The others were San Francisco (3.1%), Portland (2.9%), D.C. (2.2%) and Minneapolis (2.0%).

The chart below (from presents this data slightly differently, showing the cummulative declines from individual city peaks durring 2007, 2008 and so far this year.  Notice that the red bar is shorter than the yellow bar for both Dallas and Cleveland, indicating that their prices are actually up year to date.

The big warning signs that we were in a housing bubble were that housing prices were getting out of line with rents and with median incomes. The slide in prices over the last three years has brought us back to more normal levels. This can be seen in the two graphs below (from

Most of the adjustment in home prices is behind us, but I am not totally sure we are out of the woods. With the soft economy and rising unemployment, median incomes are not going up and are probably falling.

Major apartment REITs like Equity Residential (EQR) and Apartment Investors (AIV) have been reporting that they have had to lower stated rents recently and effective rents even more (i.e. throwing in a few free months of rent when you sign a lease). This means that rents are most likely going down nationwide, although it has not yet shown up in Owners Equivalent Rents, which is how the government tracks housing for calculating inflation. Declining rents and incomes will put more pressure on housing prices.

This will be particularly true once the artificial prop of the first-time home-buy tax credit expires. The other major prop to the market has been the Federal Reserve, which has turned into the mortgage buyer of first and last resort as it is in the process of buying $1.25 trillion in Fannie (FNM) and Freddie (FRE) backed securities. Eventually the Fed will have to reverse those actions (or inflation will spiral out of control), and when it does, the mortgage market is likely to get much, much tighter.

Still, it is abundantly clear from the charts that we are much closer to the bottom than we are from the top. We are unlikely to see a major rise in home prices going forward, but just stopping the freefall is very good news indeed. It does not repair the very significant damage that has already been done, but it does mean that things are not getting materially worse.

With more than 25 years of experience as an analyst and portfolio manager, Dirk van Dijk is Zacks’ Chief Equity Strategist.  He also manages the new long-term investing service, Strategic investor.

Read the full analyst report on “EQR”
Read the full analyst report on “AIV”
Read the full analyst report on “FNM”
Read the full analyst report on “FRE”
Zacks Investment Research