Home prices: New numbers raise hopes they're finally starting to stabilize

Falling home prices, which have been a drag on the economy, continued to decline in February but at a slower pace than in January, according to data released Tuesday by the Standard & Poor’s/Case-Shiller Home Price Indices.

But a second measurement of housing, issued by the Federal Housing Finance Agency (FHFA), found home prices up 0.4 percent on a year-on-year basis – the first such increase since July 2007.

Whereas Case-Shiller looks at all mortgages in specific cities, the FHFA data measures mortgages held by Fannie Mae and Freddie Mac, and those home prices have tended to hold up better.

Some see the numbers as pointing to a pivotal moment.

“Probably home prices are hitting a bottom,” says Patrick Newport, an economist at IHS Global Insight in Lexington, Mass. “If you live in a neighborhood where there are problems, prices are probably still dropping. But if you live in an area where there are not foreclosures, there is a good chance prices are going up.”

Some stability or even improvement in home prices would be good for the economy. Falling home prices hurt consumer confidence, which results in less spending of discretionary money by consumers as they see their wealth erode. In addition, as home prices fall, the risk is a vicious cycle of foreclosures, falling prices, and then more foreclosures.

In February, both of Case-Shiller’s indexes – one that measures 10 cities and one that measures 20 – hit new post-housing crisis lows. Also hitting new lows were home prices in nine metro areas.

Home prices in Atlanta were particularly hard hit, falling at a 17.3 percent annual rate. According to Case-Shiller, Atlanta has recorded five consecutive months of double-digit negative annual rates and seven consecutive monthly declines.

The main reason for Atlanta’s falling home values is a temporary surge in foreclosures, Mr. Newport says. According to RealtyTrac, metro Atlanta had a relatively high foreclosure rate in March.

On a national basis, housing analysts had anticipated the foreclosure rate would start to rise again since many banks had held off foreclosing on houses while they negotiated a settlement on foreclosure irregularities with state attorneys general. In February, the federal government and most of the state AGs reached a $25 billion agreement with the five largest private mortgage issuers.

The agreement will result in many individuals who are currently in the midst of foreclosure proceedings getting a reduction of as much as $20,000 in the amount of principal they owe on their mortgages. This will reduce their monthly payment. In all, the banks will commit $17 billion to reduce principal for these struggling homeowners.

In addition, the banks have agreed to give individuals who have lost their jobs a grace year to find a new job before foreclosure proceedings begin. Some 750,000 people who already lost their jobs may get a check for $1,800 as compensation for the banks’ behavior. Moreover, the banks agreed to commit $3 billion to help homeowners refinance their loans at a 5.25 percent interest rate.

Still, the forecasted big surge in foreclosures after the agreement has not yet taken place in California, notes DataQuick, a housing research firm that tracks home sales in the Golden State.

In fact, the number of California homes entering the formal foreclosure process in the first quarter sank to its lowest level in almost five years, DataQuick said on Tuesday. From January to March, some 56,258 notices of default were recorded at county offices – down 8.5 percent from the prior three months and down 17.6 percent from the first quarter of 2011.

“A few years back, there were some breathtakingly negative forecasts making the rounds regarding the foreclosure problem, some of which have played out, and some of which haven’t,” said John Walsh, president of DataQuick, in a statement.

Many housing analysts expected that the huge supply of foreclosed homes, once they went on the market, would lead to a second huge wave of foreclosures as property values plunged. But, as Mr. Walsh notes, that has not happened.

For one thing, many borrowers have been able to reset their adjustable-rate mortgages at lower rates since interest rates have remained low.

Despite the declines in the Case-Shiller indexes, the report also had some bright spots. Five of the 20 metropolitan statistical areas (MSAs) measured by Case-Shiller experienced positive annual returns. These were Denver, Detroit, Miami, Minneapolis, and Phoenix.

In fact, some of the strongest improvements are in areas that were hardest hit during the housing downturn, notes Barclays Research in an analysis. Using a three-month annualized rate, the prices in MSAs in Nevada, Florida, Arizona, and California have risen 1 percent, estimates Barclays.

According to Case-Shiller, Phoenix has now posted two consecutive months of positive annual rates and five consecutive positive monthly returns.