Nothing’s wreaked quite the havoc on the U.S. economy, and indeed the national psyche, as the six-year slide in home prices. It wiped out some $7 trillion in household wealth, savaged bank balance sheets, and induced the Great Recession and the tepid recovery.
Yet there are unimpeachable signs that this national nightmare is now over. Home prices are starting to rise, if somewhat haltingly, in most areas of the country. And a number of forecasters predict home-price increases around 10% or so nationally over the next three years, with some metropolitan statistical areas, such as Midland, Texas, and Bismarck, N.D., likely riding the energy-exploration boom to better than 20% jumps in residential-real-estate prices. The turnaround, in fact, appears to be arriving exactly on the schedule that Barron’s laid out this year in a March 19 cover story entitled “Ready to Rebound.”
Of greatest moment, perhaps, was the release two weeks ago of the S&P/Case Shiller Composite 20-City Index that showed a jump in home prices of 2.3% in June over May. Likewise the Case-Shiller National Index in the second quarter rose 6.9% over the first-quarter level, before any seasonal adjustment. And for the first time since the summer of 2010, the National Index actually nosed ahead of the year-earlier quarter’s reading, if only by 1.2%.
“This increase in home prices, unlike the one that occurred in 2009-2010 as a result of the temporary tax credit for first-time home buyers, looks to be for real,” says David Blitzer, chairman of the index committee at S&P Dow Jones Indices. “We probably won’t see a V-shaped recovery in housing, with prices overall going up 20% in the next year. But this rally has legs, and prices will definitely be higher next year.”
The recent strength seems to have continued in July and August, according to home-price indexes compiled by CoreLogic. Like Case-Shiller, the consumer, mortgage and property research firm tabulates prices based on repeat sales of the same properties, but it releases the data more quickly. CoreLogic said last week that, year over year, home prices nationally had jumped 3.8% in July and an even stronger 4.6% in August. The latter number was based on its pending, rather than completed, home-sale price index.
“It has been six years since the housing market last experienced the gains we saw in the July numbers, with indications that the summer will finish up on a strong note,” says CoreLogic CEO Anand Nallathambi. “Although we expect some slowing in price gains over the balance of 2012, we are clearly seeing the light at the end of a very long tunnel.”
TO BE SURE, any sustained recovery in prices faces some formidable obstacles. The “shadow inventory” of residences that are in some stage of foreclosure or whose owners are at least 90 days delinquent on their mortgages stands at 3.1 million–6% of the 50 million home loans in the U.S. In a normally functioning market, the total of distressed properties would be more like 2%.
Likewise, some 13 million homeowners are under water — meaning that their mortgages are larger than the value of their houses or condos. Although the vast majority of these people are current on their mortgage payments, many may be tempted to resort to a “strategic default.” This is particularly true in the event of a job loss or some other economic vicissitude.
And finally, the collapse in housing prices was so severe — nationally, residential real estate fell by over one third in value, peak-to-trough — that it would take at least a 50% jump just to restore prices to the nutty levels they achieved in 2006. Unfortunately, those were the prices at which many homes were purchased. So, for many, hope will be difficult to maintain in the years ahead.
Just look at Phoenix (see table below). Through June, it had enjoyed a 14.4% price recovery, but that rise only reduced the 55.9% decline from its peak to a 49.6% loss. Some areas like the Central Valley of California may take decades to return to the heady levels of peak valuation, when even folks who couldn’t walk and chew gum at the same time could get home loans.