Real Estate & Mortgage Insights

Home Prices Are Rising, But Will They Continue?

Measures of U.S. home prices have been on the rise for the past four months—a significant streak in recent history—but does this mean that the housing market is now on course to see continued price appreciation? The experts are completely divided on the issue.

One of the most recent home price reports, Radar Logic's RPX Monthly Housing Market Report, found that prices rose 2.6 percent in May from the previous month and 0.7 percent from May 201, exhibiting "more strength to date in 2012 than they have over the same period in the preceding three years."

Yet Radar Logic CEO Michael Feder is adamant that this is no cause for celebration. "Those people looking at current results and calling a bottom are being dangerously short sighted," he said in a press release. "Not only are the immediate signs inconclusive, but the broad dynamics are still quite scary. We think housing is still a short."

Feder believes that the rise in prices has been artificial and temporary, due to a combination of mild winter weather and a low supply of inventory. RadarLogic predicts that this short-term increase in prices will encourage more homeowners to put their homes on the market as well as more banks to list their backlog of foreclosed proeprties. This added inventory will bring prices back down.

In the meantime, Radar Logic says rising prices could discourage investors from buying. "Much of the current demand in the housing market comes from institutional investors," the company said in its release. "This demand could evaporate when prices rise to the point where investors can no longer achieve their target returns."

On the other side of opinion are companies like Zillow Inc. The Zillow Home Value Index rose 0.2 percent during the second quarter of 2012 from the year before. That's the first yearly increase since 2007. And residential values have increased for four months in a row.

The U.S. housing market had "a really solid second quarter in the midst of some economic headwinds, which indicates the housing market has some organic fundamental strength on its own," Said Stan Humphries, Zillow chief economist in a telephone interview. "The housing market has finally turned a corner."

Joshua Pollard and Anto Savarirajan, analysts at Goldman Sachs Group Inc. also see strength in the underlying conditions, citing supportive government housing policies and a decrease in the shadow inventory of distressed properties as the reasons why they recently raised their rating on the homebuilding industry.

Yet others worry that the fundamentals actually haven't improved for the housing market. Real estate data company CoreLogic estimates that 90 percent of bank-owned properties have yet to be released on the market, and when they are it could potentially sink home prices again.

"From one year to the next, price trends tend to vary much more in the second half of the year than in the first," said Quinn Eddins, Director of Research at Radar Logic. "We will have to wait to see data for October or later to know whether 2012 will turn out to be a good year or a bad year for home prices."

This is interesting and not something that I have pondered before, but it does make sense. I am on record as being largely bearish on housing. I have seen very little change in the fundamentals underlying the housing market that would suggest that we have bottomed or that the housing market is on the verge of recovery. Simply put, I believe recent home price increases have come largely as a result of an artificial constraint on supply, a constraint that will eventually go away. CoreLogic estimates that 90% of REO is being held off the market. Realtytrac estimates the number to be 85%. Either way, this supply is going to eventually hit the market, and that will weigh on prices.

Furthermore, we have seen almost no improvement in employment that would suddenly boost demand for housing. Although the number of underwater homeowners improved recently, there is still an enormous amount of negative equity that is keeping the market from clearing. Add in a massive student debt burden, low rates of household formation, soon-to-be-retiring baby boomers wanting to downsize their homes, and a host of other factors, and I find it hard to believe that housing is about to rebound. I hope I'm wrong, but I think we are in for more price declines, and then a couple of years of scuffling along the bottom before we can begin to see a real recovery.

Home prices have begun to rise amid an increase in demand, interest rates at record lows and a tight supply of properties for sale. The residential market is showing strength even as job growth weakens and concerns that the European debt crisis will hurt the U.S. economy, said Stan Humphries, Zillow's chief economist. The country's unemployment rate has exceeded 8 percent for 41 straight months.

The Federal Housing Finance Agency said today that house prices rose 0.8 percent on a seasonally adjusted basis from April to May. The median estimate of 17 economists in a Bloomberg survey was for a 0.4 percent increase. Prices climbed 3.7 percent from May 2011, according to the gauge, which is based on purchases of properties with mortgages backed by Fannie Mae or Freddie Mac.

'Inconclusive' Signs

The housing market will improve slowly in the next several years as the market works through a backlog of foreclosures and a high amount of negative equity, meaning homeowners owe more on their properties than they're worth, according to Humphries. Values probably will increase 1.1 percent over the next 12 months, Zillow said.

Initial notices of foreclosure rose 6 percent in the second quarter from a year earlier, the first annual gain since 2009, RealtyTrac Inc. said earlier this month. In the first quarter, about 11.4 million properties, or 24 percent of homes with mortgages, had negative equity, according to CoreLogic Inc. (CLGX)

Phoenix had the largest increase in home values, with a 12 percent gain in the first quarter, followed by Miami, where they rose 6.4 percent, Zillow said.

Among cities where values dropped, Chicago fell 5.8 percent from a year earlier, the biggest decline among the 30 largest metropolitan areas that Zillow follows. Atlanta, where prices fell 4.9 percent, had the second-largest decrease, the company said.

Zillow measures the value of 100 million U.S. homes, whether or not they sold during the quarter, and calculates the median for its index. Other gauges, such as the the S&P/Case- Shiller index, track purchase prices.

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