Home Prices Explained, REALLY

Home For Sale - Reduced Priced
Home For Sale - Reduced Priced

Today the National Association of Realtors reported a 12.4 percent year-over-year drop in existing home prices in March. Yesterday the FHFA reported prices on homes with conventional loans fell 6.5 percent year-over-year and rose 0.7 percent from January to February. S&P Case-Shiller reports that home prices in the nation’s top twenty markets fell 19 percent in January, year-over-year.

So why would anyone be confused, right?

There is, in fact, a legitimate reason the Realtors and Case-Shiller only use year-over-year data. While sales figures are “seasonally adjusted”, prices are not, and different types of buyers buy different types of homes at different times of the year. Historically, families tend to buy in the spring and summer months, because who wants to pull their kids out of school mid-year or even deal with a move while your kids are in school? Families tend to be middle-aged buyers, purchasing step-up homes in higher price ranges. In contrast, first-time home buyers and single or newlywed buyers tend to be the majority in fall and winter. They are looking for smaller, lower-priced homes. This is why it’s best to compare each month to the same month a year ago.

All that said, the Realtors, in a twist, decided to give the month-to-month home price changes today, because it offered, as chief economist Lawrence Yun suggested, hope of a possible “green chute.” Existing home prices rose 4 percent from February to March, according to the Realtors. Now, if you were listening before, you would say, ok, that’s because the families are getting into the spring game. But Mr. Yun points out that the usual bump up in spring prices is about 1 percent, so the 4 percent monthly bump up should be a good sign. I’m not going to argue with that, because it makes sense to me.

But what about the fact that so many economists, like Fitch Ratings, continue to predict a rather dramatic fall in prices from where we are now? Fitch is calling for an additional 12.5 percent drop in nationwide prices. “Fitch revised its projection from earlier expectations of a 10% further decline as of second quarter-2008 (2Q’08). The revision to Fitch’s October 2008 forecast is due to the extremely weak economic factors in the fourth quarter of 2008.”

Despite a bump up in sales in some of the hardest hit states, like California, Arizona and Nevada, prices are still falling because more and more distressed properties are hitting the market. The Realtors report now that 50 percent of all sales are either of foreclosed homes or short sales. That number will likely grow, as a new surge of foreclosed properties hit the market. Those properties bring down the prices of all the homes in their markets.

Today Trulia.com, a real estate search site, reports, “27 percent of homes currently on the market across the United States have experienced at least one price cut.” The cuts range from $30,000 to $295,000. Trulia is now offering the ability for users to search listings that have undergone price cuts. Again, buyers only want the bargains.

So it’s fine to say sales may be bumping along some kind of bottom in some regions, but as I have said about 900 times already, until job losses slow and the resulting foreclosures slow, home prices have nowhere to go but down.

Questions? Comments? RealtyCheck@cnbc.com