Home Prices: The Statistic That Matters Most?
by Tim Manni
“The crisis cannot end fully until home prices in the U.S. are at least stabilizing.”
-Alan Greenspan, Former Fed Chairman (hat tip: Seeking Alpha)
As we have written before, during the bottoming of an economic downturn there tends to be both a positive and negative way to interpret economic indicators — especially when they pertain to the housing market. The early stages of a recovery tend to showcase statistics that still look bad in the year-over-year term, yet display an improvement from the month prior.
The 20-city S&P/Case-Shiller Home Price index reveals that home prices declined by 0.6% percent from March to April. Despite the continued decline (home prices have dropped every month since July 2006), the number marks a vast improvement from the previous month’s report of a decline of 2.2%:
“Thirteen of the 20 metro areas also saw improvement in their annual return compared to that of March,” said David Blitzer, Chairman of the Index Committee at Standard & Poor’s.
Not only that but every metro area save one — Charlotte, N.C. — reported improvement in their monthly return compared with March.
However, there are two sides to every story. While some analysts point to these improvements as stabilization or perhaps a bottoming, others like Pat Newport, a real estate analyst with IHS Global Insight, feel the statistic is little more than a seasonal increase. Historically speaking, spring has always been the busiest home-buying season. Analysts like Newport note that there are many lagging indicators like foreclosures and unemployment that will continue to weigh on prices through the coming months.
Why do home prices mean so much?
The U.S. economy won’t regain its strength until the price of houses stops falling. And that day hasn’t yet arrived.
For the two-thirds of American families who own their homes, a house is their biggest asset. The lower house prices go, the less wealthy they are and the less they can or will spend and borrow. For home builders, the lower home prices go, the fewer new homes they will build and the fewer workers they will hire. And for many American banks and other financial institutions, mortgages, mortgage-backed securities and financial instruments that rest on mortgages remain a huge headache. The lower house prices go, the less these loans and investments are worth and the weaker the foundations of the financial system are.
“Stabilizing home prices are a welcome change, and important in that they not only strengthen household solvency, they also serve to lessen losses on lender balance sheets,” said HSH VP Keith Gumbinger. “If prices begin to improve, we will see healthier banks more willing to make new loans.”
Keep your eye on home prices. If two-thirds of American families are losing portions of their wealth every day, and if, like Alan Greenspan, you believe home prices are the ultimate indicator of our pending economic recovery, than it stands to reason that home prices may be the statistic that currently matters most.
