Helped by the “first-time home buyer” tax credit and other forms of government assistance, home prices — as measured by the Case Schiller Composite 20 index — rose for the third straight month, up 0.97%, but still down 11.36% on a year-over-year basis, and off 29.89% from its May 2006 peak (note below when I reference peak levels they are from May 2006, not from the individual city peaks, which might have been a few months before or after the national peak).

Since home prices do exhibit a fair amount of seasonality, I am working with the seasonally adjusted numbers. Most of the press has a habit of tracking the unadjusted numbers, which I feel is a mistake. So realize that the numbers presented here might be different from what you read in the newspaper tomorrow.

A total of 16 of the 20 cities registered price increases, so the gains were widespread. The older Composite 10 index registered a similar 1.03% gain for the month and is down 10.67% on a year-over-year basis, and off 30.85% from the peak.

The first graph below (from http://www.calculatedriskblog.com/) shows the history of both the Composite 10 and the Composite 20 indexes. The first-time homebuyer tax credit provides up to $8,000 to buyers of houses, but is scheduled to expire at the end of November. To claim the credit, the closing must be by that date, so any house that is going to qualify pretty much had to be under contract by now, and even in August (the data is released with a 2-month delay) people were scrambling to make the deals in time to qualify.

When a subsidy is given for a purchase, it is very much of an open question as to how much of that subsidy goes to the buyer, and how much goes to the seller. To the extent any of it goes to the seller, then what the Federal government is doing is using tax dollars to prop up housing asset values.

One would expect that a large portion of the subsidy ended up in the hands of the sellers. The acid test will be what happens to housing prices once that subsidy is removed. The Fed is also helping by its purchase of $1.25 Trillion in Fannie Mae (FNM)- and Freddie Mac (FRE)-backed mortgages, which is artificially holding down mortgage rates.

What happens to mortgage rates when they stop in March? Or will they continue to just keep the printing presses turned on and continue to buy every mortgage out there? The HAMP mortgage modification program is helping to keep the number of foreclosures down, even as delinquency rates continue to skyrocket. This keeps the supply of distressed houses for sale down. However, many of these mortgage modifications are likely to eventually fail, especially if the principal left on the mortgage remains higher than the value of the house. It is a game of “extend and pretend.”

Geographically, some of the best gains came from California, which has been among the states hardest hit by the collapse of the housing bubble. San Fransciso saw prices rise by 2.59% for the month, although prices are still down 12.49% on a year-over-year basis and off 40.00% from the peak. San Diego rose 1.52% for the month and is now down just 8.86% for the year and down 39.33% from the peak. Los Angeles saw a 1.27% rise for the month, bringing the decline since last year to 12.00% and is 39.70% below peak levels.

There were also two winners in the Midwest, with Minneapolis seeing a 2.32% gain for the month, but down 13.83% year-over-year and down 30.00% from the peak, and Chicago saw a 1.22% monthly gain. Windy City housing prices are down 12.72% from a year ago and off 22.74% from the peak.

The second graph has a somewhat different way of presenting the city performance information. It shows the declines through different dates on a cumulative basis. Thus, if the final red bar is shorter on the down side than the yellow middle bar it means that prices in that city are actually up year-to-date. It shows that many of the cities that were hit hardest early in the downturn (large blue bars) continued to suffer even bigger declines in 2008, and are for the most part still suffering declines on a year-to-date basis.

Meanwhile, cities that largely sidestepped the bubble on the way up, and which held up well as the national housing market started to turn south, such as Dallas and Denver, suffered only minor losses in 2008 and have already started to see housing prices rebound on a year-to-date basis.

While enormously expensive, the government support of the housing market is working. If housing prices continue to fall, it means more and more people will end up underwater on their homes, and being underwater is the single best predictor if a house will end up being foreclosed upon. This is already a huge problem as illustrated by an analysis by First American Core Logic.

“More than 15.2 million U.S. mortgages, or 32.2 percent of all mortgaged properties, were in negative equity position as of June 30, 2009… June’s negative equity share was slightly lower than the 32.5 percent as of the end of March 2009 and it reflects the recent flattening of monthly home price changes. As of June 2009, there were an additional 2.5 million mortgaged properties that were approaching negative equity. Negative equity and near negative equity mortgages combined account for nearly 38 percent of all residential properties with a mortgage nationwide.”

As housing prices rebound, it means that some people who were underwater are able to catch a breath, and many who were on the cusp of going underwater will stay above the waves — at least for now. The actions have served to slow the trainwreck, and that is a good thing since it gives people time to adjust and for banks to try to earn their way out of the mess (the extremely steep yield curve that is a consequence of the Fed Funds rate near zero is a very big part of that).

However, I am not convinced that the housing market has turned for real, that it will not start to fall again after the supports are removed. Prices are still above normal when measured relative to both incomes and rents, although not nearly as out of whack as they were a few years ago.

But rents are now falling, which will put additional pressure on the price to rent ratio, and with the official (U-3) unemployment rate at 9.8% and rising, with the underemployment rate (U-6) at 17.0% the income side of the price to income ratio is not looking so hot either.

Still, this is a welcome report, I just worry that it will not be sustained. I hope I am wrong about that.
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