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June 30th, 2009

Home Prices: The Statistic That Matters Most?

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“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.

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9 Responses to “Home Prices: The Statistic That Matters Most?”

  1. Nashville Homes Says: June 30th, 2009 at 8:57 pm

    As a Realtor in the middle of this exact market, I concur with the findings of Pat Newport. The gains are little more than seasonal and the year over year statistics are not nearly as rosy. The current housing devaluation is NOT over and there may even be another 2 years before the bottom. I could list the 50 reasons why this statement is true, but there is simply not enough room in this comment field.

  2. Mortgage Market, Filled with Confusing Signals | Morning Mortgage Notes Says: July 1st, 2009 at 9:33 am

    [...] agree with Tim Manni, of HSH Associates, in his assessment that housing price stability is the only important indicator of economic recovery. Homes are typically 60-75% of the average homeowners’ net worth. If that is running to zero [...]

  3. Tim Manni Says: July 1st, 2009 at 11:39 am

    Nash,

    Yeah you’re right — year-over-year stats are ugly! We could blog about this topic for years to come.

    Thanks for commenting, we really appreciate your input,
    Tim

  4. Lucia Says: July 1st, 2009 at 6:19 pm

    This may be a chicken vs egg question, but doesn’t price stabilization depend on demand which depends on credit availability? And isn’t credit availability a factor in business health which strengthens job stability and increases demand for housing? Is it naiive to focus on loosening lending standards a tiny bit so good borrowers can apply the demand principle to the housing supply?

  5. Mike for Smooth Ceilings Says: July 1st, 2009 at 7:53 pm

    If they pass the cap and trade bill, none of this is gonna matter anyway. With the additional taxes and price increases this bill will cause, any chance the economy had to recover will be smashed.

  6. Tim Manni Says: July 7th, 2009 at 9:26 am

    Hey Lucia,

    Sorry it me so long to respond to your comment, I think this one got lost in the shuffle — I apologize. For prices to stabilize first and foremost I would argue that foreclosures need to subside tremendously. Home prices are being weighed down by the sore thumbs next door, down the street or around the corner. But yes, demand is also a huge part — perhaps the most fundamental. While a big aspect, credit availability does impact demand greatly, but lack of demand is also being fostered by falling home prices and the deteriorating value of the home as an investment. Haha, you’re right, it is like the chicken verse the egg almost.

    I think your “naive” question is a really good one. My only point would be that loosening up lending standards for good borrowers is better than loosening lending standards for bad ones — which is already beginning to happen again.

    Always a pleasure,
    Tim

  7. Tim Manni Says: July 7th, 2009 at 9:28 am

    Hey Mike,

    We’re going to keep an eye on this one. One of the president’s big campaign promises was no tax hikes for the middle class. We will see.

    Thanks for commenting, please visit us again,
    Tim

  8. Visionary Realty News » Best #Realestate Home Price Numbers in Years Says: August 25th, 2009 at 10:50 pm

    [...] Newport seem up on the news. Newport equated the slowing pace of decline from March to April to the busy spring home-buying season. Yet, after several positive reports from different sources, Newport seems ready to cast the home [...]

  9. Mortgage Market, Filled with Confusing Signals — Morning Mortgage Notes Says: July 7th, 2010 at 6:24 am

    [...] agree with Tim Manni, of HSH Associates, in his assessment that housing price stability is the only important indicator of economic recovery. Homes are typically 60-75% of the average homeowners’ net worth. If that is running to zero [...]

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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