Original Post Date: August 31, 2010
By Nick Timiraos
When reading Tuesday’s report on home prices from the S&P/Case-Shiller index, use caution.
The Case-Shiller index uses data that is several months old—it’s a three month moving average, which means that Tuesday’s report shows home sales for April, May and June. That’s when the home buyer tax credits were largely still in effect.
So it’s not surprising that Tuesday’s reading showed that home sales gained by a non-seasonally adjusted 1% in the three month period ending in June from the period ending in May.
July’s weak sales figures—existing and new home sales were both at very low levels—means that sellers are going to be reducing prices if they want to sell homes. Real-estate agents across the country are describing a rare standoff in housing markets, where buyers and sellers aren’t seeing eye to eye on price.
“Until recently, the sellers were looking at data from April, when there seemed to be a recovery in the works. The buyers were looking at unemployment data and general lack of consumer confidence,” says Glenn Kelman, chief executive of Redfin Corp., a Seattle-based real-estate brokerage. “Now you’re going to see the logjam break. The low sales figures are going to force sellers to make the first move.”
Mr. Kelman says he doesn’t expect most cities to see the kind of jaw-dropping price plunges that shocked sellers in many housing markets in 2008. “Things aren’t going to get better any time soon. Some places, they’re going to get worse, but not catastrophically worse,” he says.
Last week’s Heard on the Street from Rolfe Winkler provided a good take:
The sales weakness likely is hitting prices, which are negatively correlated to elevated housing inventory. At July’s sales pace, it would take nearly 13 months to absorb existing homes on the market. Six months is normal, and any number over eight seems to coincide with pressure on house prices.
Sales probably will bounce back a bit in August, but months of supply likely will remain above eight for some time as foreclosures and seller capitulation keep inventory elevated.
So, the S&P/Case-Shiller home-price index, which stabilized at the beginning of 2009, could be set for another leg down. The index is computed using a three-month rolling average, meaning last month’s weakness really should assert itself in late October.
Analysts have been calling for another 5-10% decline in prices this year, and markets are likely to log those drops later this year because the tax credit helped buoy prices in the spring.
Analysts at Barclays Capital last week said that despite July’s terrible sales figures, they were standing by their forecast for a 7% additional decline in home prices nationally. Analysts at J.P. Morgan Chase, meanwhile, said that if home sales continue to run at a 4.5 million annual rate for the next two years, home prices could decline by another 15%, with a bottom in mid-to-late 2011.
The index is widely followed because it tracks repeat home sales instead of median home prices, which right now are particularly unreliable gauge because it reflects a shift in the mix of homes on the market.
If fewer first-time buyers are buying homes in July versus June, median sales could show a gain in prices, even though sales have plunged and prices are likely to follow. In Seattle’s King County, for example, median prices were up by 2.6% in July, says Mr. Kelman, even though sales volumes were down sharply from June.