September’s weak gain in home prices could be ominous

U.S. home prices rose in September for the fifth month in a row, a closely watched national index showed Tuesday, but the scant improvement suggests that the nascent housing recovery may be fading after a summer’s worth of steady gains.

Brisk sales fueled by low interest rates, inexpensive properties and a popular tax credit for first-time buyers helped bolster home prices in the summer. Now the resiliency of that rebound is a matter of debate among economists and housing analysts. Soaring unemployment and foreclosures are likely to weigh on the market for months, several said.

“Things are going to cool off, the economy is still weak, this tax credit surge is kind of done, the foreclosure situation is getting worse by the day,” said economist Christopher Thornberg, a principal with Beacon Economics in Los Angeles and an early predictor of the bursting of the housing bubble. “The rally in this housing market has been driven not by fundamentals but by government policy, and that is inherently a shortsighted process, and it just can’t go on like that forever.”

Home prices in 20 metropolitan areas rose a seasonally adjusted 0.3% in September from the previous month, according to the Standard & Poor’s/Case-Shiller index. That anemic increase comes after a 1.1% rise in August.

Eleven of the metro areas, including Los Angeles, saw prices rise in September on a seasonally adjusted basis, down from 15 in August. Compared with September 2008, the Case-Shiller index fell 9.4%, marking the first time in 21 months that the 20-city composite index didn’t register a double-digit drop.


This month Congress extended the popular $8,000 tax credit for first-time home buyers through April, raised the income limits for the credit and expanded it to include a $6,500 incentive for some buyers who already own a home.

Housing analysts attribute part of the recent rebound to buyers rushing to take advantage of the credit before its initial expiration Nov. 30. Some analysts now question whether enough buyers remain to keep the market moving.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said he expected the tax credit’s extension to do little to fuel a continued recovery.

Data released last week by the Mortgage Bankers Assn. suggests that a steep drop in sales is on the way. The group’s market composite index for the week ended Nov. 13 showed a 2.5% seasonally adjusted drop in mortgage loan applications from a week earlier, while refinance applications slipped 1.4% in the same period.

Purchase applications plunged 4.7% from a week earlier. It was the sixth consecutive weekly decline, bringing purchase applications to the lowest level since November 1997.

“We had people rush to buy homes, and now there is very little buying in the market, and so my guess is that we will start to see prices turn around again,” Baker said.

Foreclosures also are a growing concern. The Mortgage Bankers Assn. reported last week that a record 1 in 7 U.S. home loans was delinquent or in foreclosure as of Sept. 30, and that foreclosures were likely to keep climbing through next year.

“Soon there is going to be a huge flood of foreclosed units onto the market, and then what?” Thornberg said. “The pent-up supply is just about to start coming out of the closet.”

In California, construction of new homes continues to slide. Housing starts for 2009 are on track to be the lowest on record by far, according to the nonprofit Construction Industry Research Board, which predicted Tuesday that permits would total just 36,000 units this year.

The October total of 2,815 permits pulled was 6% less than a month before and 33% below October 2008. During the first 10 months of the year, 29,901 permits were pulled -- a 46% drop from the same period in 2008.

On the positive side, home buyers in October snapped up 6.1 million previously owned units, the fastest pace since February 2007, the National Assn. of Realtors said Monday.

The expansion of the tax credit to include some current homeowners probably will spur some sales, though many are likely to come from people downsizing into smaller, more affordable homes, said Cameron Findlay, chief economist at

Still, he expects home prices to erode 5% to 7% from their current levels next year. The uncertain job market also will weigh heavily on those potential buyers, he said.

“What’s my monthly income, and how much is my monthly mortgage payment going to be?” is apt to be the questions driving buyer mentality, Findlay said. “Three years ago they were willing to take the risk, and today they are on the other end of the scale and they are saying, ‘I don’t want any risk.’ ”

Some, however, were optimistic.

“This report is a bit more mixed than the previous month. We had some very strong performance in June, July and August -- this one is a tiny bit soggy; it is not quite as impressive,” said David Blitzer, chairman of the S&P index committee. “It doesn’t mean we are about to turn around and take a big nose dive, but we are probably going to have more modest growth.”

Home prices across the U.S. in September were at levels similar to what they were in fall 2003, according to the index. In the Los Angeles area (which S&P defines as Los Angeles and Orange counties), home prices increased 0.7% above their August levels while San Diego prices were up 1.1% over the month before.

Compared with cities in other so-called Sun Belt states in Nevada, Arizona and Florida, California appeared to be faring best.

“The Southern California housing market is in better shape. Orange County and San Diego -- those are going to be much better markets because the supply is constrained, and you can’t really build anywhere, so those have turned the corner earlier,” said Mark Zandi, chief economist at Moody’s

San Francisco registered a 1.7% month-over-month gain and, along with Washington, has reported six consecutive months of positive returns. Las Vegas, on the other hand, continued to struggle. Prices declined 1.2% in September from the prior month, marking 37 consecutive months of losses.

“The problems in Vegas are more severe than almost everywhere else -- the overbuilding, the aggressive subprime lending,” Zandi said.

The index compares the latest sales of detached houses and accounts for factors such as remodeling that might affect a home’s sale price over time.