Are housing prices about to start tumbling again?

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The latest Case-Shiller house price numbers are out, and they’re good:

Data through August 2009, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices … show that the annual rate of decline of the 10-City and 20-City Composites improved compared to last month’s reading. This marks approximately seven months of improved readings in these statistics, beginning in early 2009.

The 20-city composite index is still down 11.3% since a year ago, but the trend is in the right direction. From July to August the index rose 1.2%.  Overall, housing prices are now down 29.3% from their 2006 peak. Back in April, the apparent trough of the housing bust, they were down 32.6%.

The first thing I should say is that my worry a month ago that those who focused on the Case-Shiller numbers might be missing a turn for the worse in the housing market have so far turned out to be misplaced. The Case-Shiller indices are published with a significant lag because they’re pretty time-consuming to compile, so a month ago we had Case-Shiller indicating price gains for July while the National Association of Realtors’ median sale price numbers—which come out much more quickly—showed a price drop for August. The NAR’s data are skewed by what kind of houses are selling, so if the low end of the market is more active than the high end, the median sales price goes down even if the underlying price trend is upward. Case-Shiller corrects this problem by comparing sales prices to previous sales prices for the same homes, then using statistical adjustments to come up with a monthly index. So if Case-Shiller says house prices were up in August and the NAR says they were down, believe Case-Shiller.

Still, there’s widespread worry out there that the housing recovery of the past seven months will prove ephemeral. After correctly predicting yesterday that the August Case-Shiller numbers would be good, Ian Shepherdson of High Frequency Economics wrote:

We are very nervous that home prices will come under renewed downward pressure in next year’s spring selling season. And if the first-time buyer tax credit is allowed to expire, a renewed downshift could come as soon as the turn of the year.

As with much of the economic semi-recovery of recent months, the housing revival has been a combination of (1) bounceback from those scary moments last fall and winter when it seemed to many that the financial world might be about to end and (2) rational response to government subsidies. I’m betting that tax credit will be renewed, but the Federal Reserve has already announced that it plans to wind up its $1.25 trillion mortgage-buying binge—which has helped keep rates way, way down and thus spur home sales—in the first quarter of next year. If mortgage rates start rising next spring and unemployment is still rising, watch out in housing. It’s telling that the three metro areas that showed price declines in August—Charlotte, Cleveland and Las Vegas—are all being buffetted by non-housing-related economic problems (bad times in banking, manufacturing and tourism). It’s as Barbara wrote a while back: housing has gone back to following economic forces, rather than the other way around. So if those economic forces don’t get stronger, housing may be due for another swoon. (Update: This morning’s consumer confidence report from the Conference Board showed a second month in a row of deterioriation in October, which doesn’t bode well for those economic forces.)

I feel compelled to add here that there’s nothing intrinsically good about rising housing prices or intrinsically bad about falling ones. It’s just that there are 16 million or so homeowners out there who owe more on their mortgages than their houses are worth, underwater homeowners are far likelier to default than those who are in the black, and a further fall in house prices will only increase their number.