Housing Prices: Case-Shiller Index Rises, but Rebound Still Far Away

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Housing rebound still off in the distance (Rick Wilking / Reuters)

For the third time in three months, housing prices are up. Don’t expect that to continue.

According to the latest numbers from the Standard & Poor’s/Case-Shiller home price index, which was released on Tuesday morning, house prices in 20 large metro areas around the country rose an average of 1.1% in June. Chicago had the biggest monthly increase in home prices, up 3.2% in the last month of the second quarter. Prices even rose in foreclosure plagued Las Vegas, up 0.07%. So is the housing market set to finally rebound? Not yet. Here’s why:

First of all, let’s get what everyone should know about housing out of the way: Prices rise in the spring. It’s the time most people buy houses. So the three month run-up in prices from April through June is to be expected even in a weak housing market. The fact that we didn’t get that run up a number of times in the past few years is really a sign of just how bad things got, not how good they are now. Most parents like to be in their new homes by September, so their kids can be in place for the new school year. And it takes a few months to close a home purchase. So June could be the last month to benefit from the seasonal uptick. On a seasonally adjusted basis, homes prices actually fell slightly, down 0.1%.

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Second, despite the fact that Case-Shiller has become the gold standard for measuring housing prices – it’s much more scientific that the way the National Association of Realtors tracks the market – it’s not a great indicator for the current state of residential real estate market. That’s because of the lag. Since the end of June, which is as far as the current number reflects, we have had the debt deal showdown in Washington, the downgrade of America’s credit rating, a continued slowing of the U.S. economy and most recently hurricane Irene. All of those things have been major hits to consumer confidence. According to the Conference Board, which released numbers on Tuesday as well, consumer confidence in August alone plunged 25%. The group’s index came in at 44.5, down from 59.2 a month again, and was the lowest rating on that index since April 2009 –  a time when many were still nervous the U.S. banking system was on the verge of collapse.

Third, as Massimo Calabresi and I point out in our feature in this week’s TIME magazine, How To Save the Housing Market, there are still some deep structural problems that remain in the housing market. The largest is the debt overhang, with over $14 million people who owe more on their mortgage than their house is worth. None of those people are selling anytime soon, at least not by choice. Next, the number of people who are serious delinquent on their mortgage is rising again, and may be over 2 million homeowners. That means more foreclosures are on the way. Then there are all the vacant homes that have been repossessed by banks or abandoned by homeowners behind on their mortgages, which are dragging down the value of homes for everyone else.

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What does this mean for the housing market recovery? It means you shouldn’t expect housing prices to recover in a meaningful way anytime soon. Even with the recent three month run, housing prices still remain down 4.5% from a year ago, and 33% below their peak. Patrick Newport, who is the U.S. housing economist at IHS Global Insight, predicts that “foreclosures, excess supply and weak demand” will push housing prices down another 10%. If we hit a recession, the possibility of which IHS now puts at 40%, then home values will drop even more. So much for housing market’s 2011 spring awakening.