We saw some mixed news on the Housing Price front in February. On a year-over-year basis, both the Case Schiller 10-city and 20-city composites turned positive for the first time since December 2006, rising 1.48% and 0.70%, respectively.
On a month-to-month basis — seasonally adjusted, though — the composite ten (C-10) index increased a slight 0.09% while the composite 20 index fell an almost equally slight 0.1%. On a month-to-month basis, however, only 5 of the 20 cities in the C-20 (the C-10 is a subset of the C-20, but with a longer history) posted increases, while prices fell in 15 cities. On a year-over-year basis, 9 cities were up and 11 were down.
From the peak in May 2006, all 20 cities are down — the C-10 is down 29.93% and the C-20 is off 29.25%. The first graph below (from http://www.calculatedriskblog.com/) shows the year-over-year change history of the two composites.
Clearly, it appears that the worst is over. However, the housing market has been the direct beneficiary of extraordinary levels of government support, and major portions of that support are going away. The Fed bought up $1.25 trillion in residential mortgage paper, which probably kept mortgage rates between 30 and 50 basis points below where they otherwise would have been (based on historical spreads over 10-year T-notes).
Also, housing transactions are being subsidized by the homebuyer tax credit, and economic theory suggests that when a transaction is subsidized, both the buyer and the seller share the benefits. The seller side of the benefit shows up in the form of a higher price.
That tax credit is about to come to an end. Contracts must be signed by the end of this month, and the closing has to happen by the end of June. It is very much an open question if the current momentum in housing prices can be sustained.
The second graph below (also from http://www.calculatedriskblog.com/) shows the change by city over time. The dark blue bar shows the damage that occurred through the end of 2007, while the red bar shows the decline through February of this year, (light blue through 12/08 and yellow through 12/09).
Thus, if the red bar is shorter to the downside than the yellow bar, it means that prices are rising in that city so far this year, and similarly if the yellow bar is shorter than the light blue bar it means that prices were rising in 2009. This shows some cities that were hit hard early in the crisis have started to show some of the most significant improvements, while other hard-hit cities early on have continued to crumble. Some cities that largely escaped unscathed in the early going have fallen later on, while others are still holding up well.
Results by Region
Among the hard-hit-but-recovering areas are the three Californian cities tracked. San Francisco, Los Angeles and San Diego are all down by between 35.9% and 37.2% from the peak, well above the composite numbers, but they have staged some of the most impressive rebounds. On a year-over-year basis, SF has seen prices rebound by 12.1%, while SD is up 7.6% and LA is up 5.4%. All three were also up on a month-to-month basis.
The other early poster children for the housing bust have not fared as well. Las Vegas continues to be the hardest hit, down 55.7% from the peak, and it is also down more than any other city on a year-over-year basis, off 14.6%. However, it might have a little spark of life in it, since prices actually rose slightly (0.14%) on a month-to-month basis. Phoenix also continues to slide (and not yet live up to its name), off 51.0% from the peak and down 1.58% year over year, and down 0.42% for the month.
The two Florida cities tracked, Miami and Tampa, also continue to struggle, down 47.4% and 42.2% from the peak and down 4.4% and 6.0% over the last year — and still falling on a month-to-month basis, by 0.26% and 0.31% respectively.
On the other hand, Dallas, which has held up better than any other city from the peak, posted the one of the worst month-to-month performances, with a decline of 1.39%, but it is still up 2.71% year over year and is down just 4.1% from the peak. Denver shows a similar pattern, up 3.7% year over year, and just off 8.2% from the peak, but slipping slightly (0.18%) for the month.
The Pacific Northwest representatives in the sample, Seattle and Portland, held up very well in the early going but seem to be catching up with the rest of the country. Portland’s month-to-month decline was even worst than that of Dallas with a 1.87% decline, while Seattle was down 0.78 on the month. Year over year, Seattle is down 5.9% and Portland is down 4.7%, while from the peak they are still down slightly more than half as much as the overall composites at 16.3% and 16.5%, respectively.
I suppose this does go to show that, as the realtors like to say, every market is different, and that past performance — even in housing — is no guarantee of future returns. The rebound in California is interesting given that state’s well-publicized budget woes and the resulting probability that taxes there are likely to rise while services are likely to be cut. It is also very good news for the banks that have heavy exposure to California, such as Wells Fargo (WFC) and Bank of America (BAC).
The Overall Effect
While we don’t want to go back to the time when prosperity was being built on ever-inflating housing asset values, a stabilization in housing prices should go a long way in restoring consumer confidence. Beyond that, each time prices fall, more people fall underwater on their mortgages, making them much more likely to default on them.
Each time prices rise, some people that were below water are able to peek their heads above water and take a breath. Even for those that are still underwater, a rising trend might make them think that it is still worth their while to keep paying their mortgages in the hope that prices will eventually recover to the point that they have positive equity again in their homes.
While this was a mixed report, on balance I would have to rate it as a net positive. If home prices can remain stable or even rise slightly after the government training wheels come off, it will be very good news indeed.
Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.
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