Home prices rise in June, but a drop may be looming

A closely watched national index showed Tuesday that home prices rose in June, the last month that a federal tax credit probably boosted sales. Many experts predict a drop in values in coming months without the popular government stimulus.

Prices of previously owned single-family homes rose a modest 1% in June over May and 4.2% over June 2009, according to the Standard & Poor’s/Case-Shiller index of 20 metropolitan areas.

“While the numbers are upbeat, other more recent data on home sales and mortgages point to fewer gains ahead,” said David M. Blitzer, chairman of the index committee at S&P.


Federal tax credits of up to $8,000 drove sales during the spring as first-time buyers flooded into the real estate market, boosting sales of entry-level homes. Sales have been falling since the expiration of those credits, with sales of previously owned homes plunging 27.2% in July and sales of new homes falling 12.4% that month.

Tuesday’s home price report encompasses sales data from April, May and June. Future reports will show the slackening sales demand in July.

“We know the bottom fell out because of the tax credit, and it’s hard not to think that won’t be reflected in prices,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “We are going to see some big falls pretty quickly.”

Baker predicts declines of 15% to 20% in some markets, including West Coast cities, Boston and New York.

Prices peaked in mid-2006 and then began falling, eventually bottoming out in April 2009 at a 32.6% loss. Since then prices have improved and were up 6.3% through June, according to the 20-city index. A separate index that tracks home prices nationally showed prices rising 4.4% in the second quarter from the first quarter and up 2.6% from the second quarter of 2009.

Paul Dales, U.S. economist for Capital Economics, said he expects prices to fall 5% to 10% without the tax credits, which will probably affect consumer sentiment and the health of financial institutions.

“Falling prices put a dent in household wealth, and that basically means if households feel less wealthy they will spend less. It will also mean more households will fall underwater, which could further restrain spending,” Dales said. “And it is possible as well that home price declines could result in more bank losses.”

A home is said to be “underwater” when the value of the house falls below the amount owed on the mortgage.

Home sales in California were boosted this summer by a credit of up to $10,000 for first-time purchasers and buyers of new homes. The non-seasonally adjusted index showed home prices in California cities continued to appreciate, with Los Angeles up 0.6% from May, San Diego up 0.4% and San Francisco up 0.3%.

Las Vegas was the only city where prices declined, falling 0.6%. Phoenix and Seattle were flat.

Cities in the Midwest gained the most, with Chicago, Detroit and Minneapolis each up 2.5%.