(By Eric Landry) In an August 2010 Stock Strategist, "
Housing: A Tale of Two Time Periods," we surmised that home prices would be pressured for at least the remainder of 2010 but that the long-term outlook for at least stable prices was actually pretty good. Unfortunately, the first part of the forecast turned out to be spot on--home prices sank 3.5% between July and December according to the popular Case-Shiller 20-city index. The expiry of the federal homebuyer tax credit, combined with high levels of existing inventory, a weak economic recovery, and terrible consumer sentiment, made for difficult back half of 2010 in the housing market, to say the least.
Today, we're becoming more constructive on near-term prices. In fact, we wouldn't be surprised to see a decent upward move in the popular Case-Shiller indexes in the very near future. Figure 1 shows that listing prices in the index have already started a rebound after a horrendous December. While these median listing prices often suffer distortions from changing mix, they've proven to be a relatively reliable predictor of short-term movements in the popular Case-Shiller indexes.
As can be seen on the chart, median prices showed a very positive signal in spring 2009, an event that preceded a most unlikely multi-month period of increasing home prices. This year, we see good odds that the same dynamic will take place, with modestly increasing prices set to surprise all but the most contrarian observers. In fairness, prices generally enjoy seasonal strength starting in the spring and lasting through summer. We think there's something more at work here. Notwithstanding terrible February housing start numbers, recent talk from the builder community is that traffic has been a pleasant surprise so far this spring selling season. That dynamic, combined with other evidence, suggests to us that the market may finally be able to stand on its own in some markets. In addition, underlying Case-Shiller data suggest that several cities actually started to perk up in December, a full two months before this crucial period. San Francisco, Denver, Washington, D.C., Miami, Atlanta, Boston, Portland, and Dallas have all shown price trends improving in December from the prior couple of months (either lessening declines or outright sequential gains). Only Tampa, Detroit, and Seattle are showing demonstrably worse trends in December, in our opinion. Bottom line, we think home prices may pleasantly surprise some people in the not-so-distant future.
But the long term is where the real money is made, and unfortunately the above-mentioned analysis isn't going to much help outside six to eight months.