Home Prices Improve, For Now…

Although home prices in April came in surprisingly firm, real estate analysts expect values to weaken in the coming months as the effects of federal stimulus efforts wear off.

Home prices in 20 major U.S. cities increased nearly 1 percent in April from March to remain roughly 4 percent higher than a year earlier, according to the most recent S&P/Case-Shiller home price report. "This was much stronger than both our and consensus expectations of a 0.1% decline and represents the strongest monthly increase since August 2009, as well as the biggest annual gain since September 2006," Theresa Chen of Barclays Capital said in a report. Overall, home prices in 20 major cities are still down 30 percent from their peaks in the summer of 2006, but that's an improvement over the 33 percent peak-to-trough drop posted in April 2009. The report was released Tuesday. 

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Still, housing analysts suggested that the report was less encouraging than it might appear. Although sales were aided by lower prices and attractive mortgage rates, buyers were also lured by a tax perk from Uncle Sam. "We would caution that April was the last month in which the federal homebuyer tax credit was available, and therefore may have temporarily boosted prices," Zach Pandl, an economist at Nomura Securities, said in a report. 

To jumpstart the ailing real estate market, President Obama in early 2009 enacted legislation providing up to $8,000 in tax breaks to qualified first-time home buyers. The program was later extended and expanded to include even qualified current homeowners who signed a sales contract by April 30 and closed the transaction by the end of June. Home sales dutifully increased during the run-up to the signing deadline, as buyers pushed up transactions that would have otherwise occurred later in order to take advantage of the credit. 

Patrick Newport of IHS Global Insight notes that Case-Shiller indices aren't simply static monthly figures, but rather three-month moving averages. "So April's readings reflect transactions in 20 markets that closed in February, March, and April," Newport said in a report. "These were months in which demand was picking up because of the second homebuyers' tax credit. April's broad-based increase in prices, the first in seven months, thus, is without a doubt related to this credit." 

But in the weeks after the deadline for contract signings has passed, housing metrics have weakened substantially. The volume of home-purchase mortgage applications fell sharply. And new home sales in May—the first month after the deadline for contact signings passed—plummeted 33 percent to an all-time low. (New home sales are tallied at contract signings.) 

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As a result, housing market experts worry that prices could show renewed weakness once the effect of the stimulus wears off. "Other housing data confirm the large impact, and likely near-future pullback, of the federal program," David Blitzer, chairman of the index committee at Standard & Poor's, said in a statement accompanying the release." Inventory data and foreclosure activity have not shown any signs of improvement. Consistent and sustained boosts to economic growth from housing may have to wait to next year." 

For his part, Newport expects Case-Shiller indices to increase over the next two or three months, before turning south. "In our view, the housing glut and foreclosures will drive the national Case-Shiller index down another 6–8%, with prices bottoming in 2011," he said.