Home Prices are Improving in Ways that Trouble the Housing Market
Home prices are up in two leading economic indicators today, but instead of reacting positively, the housing industry remains troubled by the not-so-good news. The 25-MSA Radar Logic residential property index (RPX) Monthly Composite for May finds that home prices increased 2.1% on a year-over-year basis, but adds that gains were not large enough to be described as a recovery. When looking at more than the numbers, Michael Feder, CEO of Radar Logic said the bigger picture points to more evidence of weakness, than strength. "The patterns in this month's data are, in fact, troubling," said Feder. "Activity has rebounded over the last year, but there has been a shift toward lower priced housing. We have not seen the recovery in prices that we would have expected with the return of volume." U.S. house prices rose 0.5% between April and May, according to the Federal Housing Finance Agency's (FHFA) monthly House Price Index report. This is 1.2% lower than one year ago. The Pacific Census Division (Hawaii, Alaska, Washington, Oregon and California) saw the greatest rise in prices at 1.8% while the East North Central (Michigan, Wisconsin, Illinois, Indiana and Ohio) saw a drop of 0.6%. Although house prices seem to be on a slight yet steady rise after going up by 0.3% in March and 0.9% in April, Capital Economics economist Paul Dales is not convinced the trend will continue. He believes that housing market activity has yet to translate into double-dip prices and that the market could be as much as 5% below current levels by the end of next year. "Admittedly, house prices on the seasonally-adjusted FHFA measure increased by 0.5% m/m in May. That was the third rise in as many months," Dales said in data response Thursday. "But prices in May were probably boosted by the lingering effects of the surge in demand generated by the homebuyer tax credit. Now that demand is falling, it won't be long before prices start to fall too." In a statement from RPX, sales of foreclosed homes by lenders and mortgage servicers, which Radar Logic calls "motivated sales," decreased as a percent of total sales over the last year. These properties still accounted for 24% of home sales across the 25 MSAs tracked by Radar Logic. Motivated sales do not include short sales, bank-sanctioned sales by home owners for less than their outstanding mortgage balance. If short sales were included, motivated sales would account for a considerably larger share of total sales. "The implication is that there is little volume in the sectors that are most likely to contain the 'underwater' loans, and as a result, the market is not absorbing this overhang," Feder added. "Unless this inventory overhang is remedied through market or structural forces, it will certainly continue to stifle any early recovery in housing." Write to Christine Ricciardi.