For those looking for a bright spot amid the barrage of depressing data recently, news that housing prices were up for the third month in a row might have buoyed morale a bit.
The latest data from the Standard & Poor's/Case-Shiller home price index showed that home prices in the nation's largest metropolitan areas ticked up 1.1 percent, on average, in June, following a 1 percent increase in May. Chicago and Minneapolis saw the largest month-over-month increases, both recording 3.2 percent increases in home values, on average. Even metro areas hit hard by the foreclosure crisis saw incremental gains: Atlanta posted a 1.5 percent increase, while Phoenix saw a 0.3 percent gain.
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So has the housing market finally found its footing?
Maybe not. While prices have been on the rise for a few months, experts don't expect the upward trend to continue. Most predict home values will fall in the coming months, not bottoming out until the first half of next year. "I would expect that prices fall a little bit more," says Celia Chen, senior director at Moody's Analytics. "Any improvement in stability is temporary."
U.S. News talked to experts about why the housing outlook might not be so rosy after all:
Seasonal bump. One reason home prices have seen a temporary bump has to do with the time of year. Even in this weak market, more homes tend to be bought and sold in spring and summer, which boosts demand and gives real estate values a lift. "A seasonal kick accounts for the recent strength in the indexes," wrote Patrick Newport, economist at IHS Insight, in a recent report. "The kick will wear off in the fall when demand weakens and sellers have to give way on price, and prices will start dropping again."
Even with the seasonal uptick, prices are down 4.1 percent compared with June 2010, and down 33 percent from their 2006 peak, meaning the housing market still has a lot of ground to make up. And it faces stiff headwinds. More foreclosures and excess supply coupled with weak demand could drive prices down another 10 percent, Newport predicts. The outlook is even worse if the economy slips into another recession—a 40 percent probability, he says. "The unemployment rate will climb, driving foreclosures up, leading to an even larger drop in home prices."
Underwater mortgages, distressed properties. The housing market meltdown has left millions of Americans owing more on their mortgages than their homes are worth, and until sagging prices stop draining home equity, that debt overhang will continue to bottleneck the housing market. The number of Americans facing serious delinquency on their mortgages is rising as well, another troubling fact that could translate into even more foreclosures flooding the market.
On top of fresh foreclosures expected to hit the market, properties held up for legal reasons are likely to stream onto the market in the coming months as well. Finally, abandoned or vacant homes—the product of overbuilding—only add to the glut of supply and will pull down home prices for the foreseeable future.
Index methodology. Although Case-Shiller numbers have become one of the most popular metrics used to measure house prices, critics argue that the indices shouldn't be used to gauge the health of housing market from a consumer point of view, primarily because they lag signed contract data by about six months.
"It's equivalent to waking up in the morning at the end of August and deciding what clothes you're going to wear based on the average temperature in February," says Jonathan Miller, president of New York City-based Miller Samuel Real Estate Appraisers. "If that's what you want to know, then it's helpful, but that's not how the index is being applied."
Since the end of June—as far as the data goes back—the country has endured a slew of natural disasters, a debt downgrade that shook consumer confidence, and reports that America could be slipping into another recession, none of which have been factored into the most recent Case Shiller numbers.