Housing Market Better Than It Looks

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Home prices rose 0.1% on a seasonally adjusted basis in March, according to new numbers from the S&P/Case-Shiller index. But four cities showed worse results in March than they had in February, with Atlanta notably down 0.4% over the previous month and Detroit down 2.1%. Still, there are reasons to be optimistic.

Year-over-year, prices in real-estate-challenged Atlanta are down a whopping 17.7%, setting a new low for the city. Prices were also down year-over-year in Boston (-1.0%), Chicago (-7.1%), Cleveland (-2.4%), Las Vegas (-7.5%), Los Angeles (-4.8%), New York (-2.8%), Portland (-2.8%), San Diego (-2.7%), San Francisco (-3.0%), Seattle (-1.3%), Tampa (-1.0%) and Washington, D.C. (-0.6%). Overall, the 20-city composite was shown to be down 2.6% year-over-year.

Why such a slew of bad results when other recent housing reports have been positive? The answer is that Case-Shiller includes distressed sales. If you sell a home to someone who uses subprime loan financing to buy it, the sales price comes into the county clerk’s office and is an input to Case-Shiller data. In contrast, federal indexes such as the Federal Housing Finance Agency catch home sales backed by “good” — that is non-subprime — financing.

FHFA’s March numbers, released less than a week ago, have been great, showing housing prices up 1.8% month-over-month and up 2.7% year-over-year.

Think of the differing housing numbers this way: if you want to track the price of suits and slacks, the FHFA measurement would be the equivalent of seeing what’s selling at Dillard’s, J.C. Penney’s and Saks. The Case-Shiller measurement would be all those, while mixing in what’s selling in the bargain basement at the Salvation Army thrift store.

Cities like Atlanta, where there is a pipeline of foreclosures coming to market, look like they’re having a lot of Salvation Army sales. That doesn’t necessarily reflect prices in wealthier suburbs like Buckhead, however.

Overall, foreclosures and distressed sales are becoming a smaller slice of the pie, according to the National Association of Realtors. NAR reports that foreclosures and distressed sales made up 28% of all sales in April, down from 37% the year before.

The foreclosure effect weighs so heavily in Case-Shiller that when it’s removed, city prices can soar. Phoenix is up 2.7% month-over-month and 6.1% year-over-year. Miami, which has been generating good news for months now, is up 1.9% month-over-month and up 2.5% year-over-year.

In both cases it looks like a lot of the distressed inventory in those markets has been worked through, though I would caution potential homebuyers in any market to look into the foreclosure pipeline in their area before putting down a bid on any property.

Also, city dwellers should bear in mind that both indexes track single-family homes and not apartments. The Case-Shiller -2.8% decline in New York, for example, doesn’t reflect the market for multi-million-dollar luxury co-ops in Manhattan.

That said, Case-Shiller can be examined against itself. This is the second month in a row that prices have been up — however marginally — in the 20-city index. If next month’s numbers are also good, that would provide support for the optimism of homebuilders, who, according to Housing Wire, have seen a 22% jump in growth of orders.

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