Home Prices Jump Again. Are We Out of the Woods Yet?

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Home prices as measured by the S&P/Case-Shiller Home Price Index jumped 6.8% year-over-year last December, closing out 2012 with a strong showing, as they’d risen 5.5% on the same basis the month before. Prices rose in 19 of the 20 metro areas tracked by the index, with only New York City as an outlier. (Gothamites, realize that the NYC data excludes co-op and condominium apartments, tracking instead the price of single-family homes in the metro area).

Especially stunning is the fact that except for Chicago (up 2.2%), Cleveland (up 2.9%), and Boston (up 3.6%), all of the metro area gains recorded were greater than 5%. On the high end, Detroit housing prices rose 13.6% year-over-year, while San Francisco zoomed 14.4%, and Phoenix roared up 23%.

Nationally, the index (which showed 15 years of house price increases up to its peak early in 2006) is now back to the levels of summer 2003. So is the housing slump over yet?

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Probably not, as anyone involved in the market can tell you. For one, inventory is historically low in many markets. According to the National Association of Realtors, there are currently only 1.74 million homes on the market across the country, which is the lowest level in nearly seven years, just a 4.2-month supply at the current pace.

Yet the bulk of home sales tend to hit in the spring and summer, so the tea leaves for 2013 won’t come out next month but rather three months from now, when Case-Shiller and other reports provide March data.

The trillion-dollar question to economy watchers is whether those reports will measure a strong flow of sales or a weak one. If spring ends up with too many investors chasing too few houses, we could end up seeing increasingly rising prices that don’t reflect much underlying strength. (Earlier this month, CNBC analyst Diana Olick raised concerns about “bubble price dynamics” caused by hedge funds.) On the other hand, if you’re a potential homeseller, and you see data reports of prices clocking along nicely, you might be tempted to list your home — which would be the recovery working the way Econ 101 professors say it should.

The key numbers to watch going forward, I think, are sales volume and cash sales. For January, the NAR reported sales at an annualized pace of 4.92 million units. If we start to see five-and-a-quarter million, or even five-and-a-half, later this spring, the housing market might finally be out of the woods for real.

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Provided, that is, that those transactions are between homesellers and homebuyers, and not homesellers and investors. The way market watchers make that distinction is to look at “cash purchases” — investors typically buy homes out of foreclosure with cash, while Joe Average usually buys his home with a mortgage from a bank or credit union. All-cash sales, according to the NAR, were 28% of transactions in January, down from 31% the year before. In looking at the housing market, it’s a good sign that that number is dropping. For data watchers, sometimes down is the best sign that things are looking up.