U.S. House Prices Should Generally Rise Going Forward, But Not Without Some Dips

U.S. home prices started to rise in recent months, and Standard & Poor’s Ratings Services expects this to continue into the summer, given the seasonal trends of the past few years. We don’t expect this rise to be uninterrupted, however. Prices will likely dip again later this year as newly foreclosed properties reach the market, and then pick up again slightly next year. Looking at the big picture, the U.S. economy is growing too slowly to have any boosting effect on the housing market at this time. Economic factors, such as weak employment growth and the Euro debt crisis, could somewhat thwart the housing recovery. Additionally, the U.S. fiscal cliff could be a key risk if Congress does not reach a decision by the end of the year. Despite these potential risks, we do believe that prices will generally improve this year from last.

After declining for seven straight months, the S&P/Case-Shiller 20-City home price index rose 1.3% month-over-month (MoM) in April. Prices are now 34% below their mid-2006 peak. We expect May home price data (S&P/Case-Shiller reports on July 31st) to continue to highlight this improving trend.

CoreLogic’s home prices rose 2.5% in April and 1.8% in May, the second and third straight monthly increases, respectively. The FHFA index was up 1.7%, also the third monthly gain. National home prices were higher in April for all three major indices, and CoreLogic already reported higher prices for May. We have observed that regional home prices are following the same trend, particularly in Phoenix, San Francisco, and Washington, D.C.

We expect home sales to continue to improve during the summer months. The slow rise in sales has nudged gradual upticks in the U.S. housing market, in our view. Existing home sales were flat in May, but dropped 5.4% in June; however, sales rose 4.5% on a year-over-year (YOY) basis. In addition, median prices rose 5% in June and inventory dropped 3.2%. Pending sales were up 5.9% in May, which is a positive sign for existing home sales in the coming months. New home sales were strong in May, up 7.6%. Mortgage rates are hitting a new low in July in tandem with housing affordability’s first-quarter record high. Mortgage credit is still limited; housing demand and prices could suffer later this year because of a slow economy and weak job growth, as well as seasonal effects.

Signs point positive. The amount of distressed properties still on the market (shadow inventory) is gradually leveling off, and the latest home prices are responding positively to reduce supply. Additionally, foreclosures have stabilized in recent months.

Despite the overall stabilization of loans in foreclosure, the inventory is still growing in judicial states. In general, mortgage modifications, negative equity, and slowing foreclosures have reduced housing supply in recent months, helping home prices to recover. According to CoreLogic, about 11 million homeowners who have more debt in their existing mortgage than the current market value on the home (or underwater borrowers) have generally avoided placing their houses on the market. This has helped to lower supply and push home prices higher.

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