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Raising the Roof on Home Prices?

Contrary to recent headlines, home prices are displaying seasonal strength.

Eric Landry, Associate Director, 05/24/2011

That's right, house prices are currently going up, though you wouldn't know it from the grim parade of negative headlines of late. Almost exactly two months ago, we wrote that, after a very rough several months, the leading indicators we monitor were suggesting better days ahead for home prices throughout most of the country. We still think a spring bounce is in the cards for the popular Case-Shiller indexes relatively soon. Rising prices have been highly evident in the median listing prices reported throughout the country for several weeks now. We think this will trickle down to the popular indexes sooner rather than later.

Of course, seasonality is driving much of what's currently happening. At this time of year, in a normal real estate environment, prices usually show resilience. We can't rule out the fact that this year's bounce is nothing more than that. Nor can we rule out the notion that seasonal weakness in the fall and winter months won't significantly overwhelm any spring or summertime gains, resulting in yet another annual decline for 2011.

Nevertheless, we counsel investors not to brush aside near-term home price increases as an aberration, or nonevent. Neither 2007 nor 2008 enjoyed any positive bounce during the spring months, a phenomenon that led to steep annual declines during each of those years. More recently, 2009's relatively strong spring months managed to offset weakness in the winter such that prices declined only in the mid-single digit range that year. With any luck, the same -- or an even more favorable -- scenario will arise this year, giving potential buyers (and maybe more importantly, lenders) some confidence that the rout in prices has mostly run its course.

To get a jump on all the popular home price indexes, such as the Case-Shiller or the Federal Housing and Finance Agency (FHFA) indexes, we look at median listing prices throughout the country to discern the direction and magnitude of the trends likely to show up in these popular home-price indexes in coming months. Of course, median listings are subject to distortion due to mix issues, so the data doesn't align perfectly with the above-mentioned paired-sale indexes. Nonetheless, the real-time signals rendered by median listing prices are a valuable tool in discerning both the direction and magnitude of price trends.

On the chart below, we've sliced and weighted our listing price data to mimic the Case-Shiller 20-city index for the past several years. Median listing prices generally lead Case-Shiller prices by a month or two. While some tracking error is evident, the real-time data has a track record of correctly anticipating Case-Shiller price movements.

Through the first two weeks of May, the 2011 bounce is already bigger than all of last year's seasonal increase, as well as those of 2006, 2007, and 2008. Only 2009, a year whose results benefited generously from government stimulus, has shown similar strength to what we're seeing now. Granted, this year's activity is springboarding from a lower base, as December 2010 activity was among the weakest in our data set. But those days are now decidedly in the rearview mirror.

We also spend considerable time analyzing the Case-Shiller National Home Price Index, which is published quarterly. Here too, investors can expect firming prices. As the below chart suggests, real-time data has an impressive forecasting track record on a national basis, and the news here is similarly good.

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