Home Prices Improve, But May Soon Begin Sliding

Real estate values in 20 major U.S. cities increased 1.3 percent in May from the previous month.

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Although home prices improved notably in May, real estate values are expected to deteriorate as we head into the fall.

Home prices in 20 major U.S. cities increased 1.3 percent in May from the previous month on a non-seasonally adjusted basis, according to the most recent S&P/Case-Shiller home price report. May's stronger-than-expected reading "pushes the [annual] growth in the index to 4.6%, the largest gain since August 2006," Theresa Chen, an economist at Barclays Capital, said in a report.

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But David Blitzer, chairman of Standard & Poor's index committee, warned that May's figures were not as encouraging as they might initially appear. "While May's report on its own looks somewhat positive, a broader look at home price levels over the past year still do not indicate that the housing market is in any form of sustained recovery," Blitzer said in a statement accompanying Tuesday's release.

He noted that while home prices have improved nicely from their April 2009 lows, they remain at roughly the same levels they reached last October. "The housing market has really only stabilized at this lower level," he said. "The last seven months have basically been flat."

What's more, May's home price data was inflated by two key factors that will soon disappear. First, real estate demand typically picks up in the spring and early summer, as families look to settle into their new properties before the start of the school year. But while these seasonal home-buying patterns helped push values higher in May, they will begin working against the market in the late summer and fall, when sales tend to decline.

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The most recent figures were also amplified by a federal stimulus program. Uncle Sam had been offering tax credits worth up to $8,000 for qualified home buyers who signed a binding sales contract by April 30 and closed the transaction by the end of June. (The deadline to close has since been pushed back to September 30.)

Case-Shiller home price indices are not based on a single month's data, but on three-month moving averages, notes Patrick Newport of IHS Global Insight. As such, May's report used data from home sales that closed during March, April, and May. Existing home sales increased in March and April—as buyers scrambled to qualify for the tax credit—before weakening in May.

"We need to watch where the housing markets will go after these temporary stimuli go away," Blitzer said. "June's existing and new home sales and housing starts data do not show much real improvement in those statistics either."

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Ian Shepherdson, chief U.S. economist at High Frequency Economics, expects the expiration of the tax credit to begin undercutting the Case-Shiller home price indices in July. "Any decline in prices, however, will be at a modest rate compared to the headlong plunge recorded from the fall of '07 through the spring of '09," Shepherdson said in a report. "U.S. home prices are now at record lows relative to incomes and we see little basis for expecting further sustained declines."

For his part, Newport expects the Case-Shiller indices to improve for two more months before falling. "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 in a report.