Home Prices Slide in March

The March S&P/Case-Shiller Home Price Index report contains some deicidedly mixed news: while home prices are higher than a year ago, they fell over the first quarter of 2010.

Housing optimists will likely emphasize the 2.3% increase in the 20-city index on a year-over-year basis. The 10-city index also rose 3.1% on the same basis. On the other hand, pessimist will point to March's non-seasonally-adjusted 0.5% decline in the 20-city index, and the 0.4% drop in the 10-city index. In February, the indexes fell 0.9% and 0.6%, respectively.

So was March a good month for the housing sector, a temporary setback, or something more serious? David M. Blitzer, chairman of the Index Committee at Standard Poor's, is concerned about the recent dip.

"The housing market may be in better shape than this time last year; but, when you look at recent trends there are signs of some renewed weakening in home prices," Blitzer said, in a statement. He added: "While year-over-year results for the National Composite, 18 of the 20 MSAs [metropolitan statistical areas], and the two Composites improved, the most recent monthly data are not as encouraging."

March: Widespread Price Drops

March price data for the cities support Blitzer's evaluation. Thirteen of the top 20 U.S. cities recorded price declines in March, on a non-seasonally-adjusted basis. The decliners were led by Detroit, where prices plunged 4.1%, followed by Minneapolis, down 2.7%; Chicago, down 2.3%; Atlanta, down 1.8%; and Charlotte, N.C., down 1.1%.

The percentage price changes for March in major U.S. cities were as follows: New York, down 0.7%, Boston, unchanged; Washington, D.C., down, 0.7%; Miami, down 0.9%; Dallas, up 0.4%; Denver, up 0.6%; Los Angeles, down 0.7%; San Francisco, up 1.5%; and Seattle, up 0.1%.

Still, despite the monthly price declines, an optimist could point to the 2.3% and 3.1% year-over-year increases in the 20-city and 10-city indexes, respectively, as evidence that housing sector conditions have improved over the past year.

The latest reports about other economic fundamentals do little to tip the scale in favor of either the optimists' or the pessimists' arguments. The resumption of monthly U.S. job growth and an impressive manufacturing recovery are bullish factors, but Europe's debt crisis and the end of the federal home-buyer tax credits are bearish ones.

A Fragile Recovery for Housing

In sum, the U.S. housing sector is in better shape than it was a year ago, but this spring's price data describes a setback. The sector appears to be in the process of defining a bottom, but the recovery is fragile. Further, given the large inventory of existing homes (an 8.4-month supply) and new homes (a 6.7-month supply) for sale, the recovery could easily stall if job growth falters, credit conditions tighten, or both.

Because of that, in addition to helping Europe keep its credit markets liquid, U.S. policy makers may want to consider renewing the home-buyer tax credits, which expired on April 30. If Congress does so, it would represent the tax credit's third stage, and the third time may prove to be the charm when it comes to achieving a sustained recovery in the U.S. housing sector.