Home Prices Rise in June Due to First Time Homebuyer Tax Credit

S&P Case Shiller released their Home Price Indices for the month of June today, and it showed an increase in U.S. home prices.  Prices rose 4.4 percent in the second quarter of 2010, following a 2.8 percent decrease in the first quarter.  It is important to note that this index is a three month average with a two month lag.  As a result, it measures conditions as they were several months ago.  All current indicators point to home prices falling, and the report itself states “housing prices have rebounded from crisis lows, but other recent housing indicators point to more ominous signals as tax incentives have ended and foreclosures continue”.

From the report

“The monthly Composites cover June and the national index covers the second quarter, when the government’s program for first time home-buyers was winding down.  While the number are upbeat, other more recent data on home slaes and mortgages point to fewer gains ahead,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.  “Even with concerns about near term developments, we recognize that the housing market is in better shape than this time last year.  Further, California’s cities have moved from some of the hardest hit to three of the four leading cities based on year-over-year gains”.

Of the 20 metro areas surveyed, 17 showed prices gains in the most recent survey.  Again, most of the price gains are attributable to the first time home buyer tax credit, which expired at the end of April.  Those who signed purchase agreements prior to the end of April had until the end of September to actually close on their home.  For this reason, many of the prices gains caused by increased demand due to the tax incentive were realized in the months following April.

Many analysts are now predicting that home values will decline somewhere between 5 and 20 percent over the next year or two.  There are three factors that will likely contribute to this decline in prices.  The first is the collapse of demand for housing after the expiration of the tax incentives.  The second reason is the huge overhang of housing supply, due in part to foreclosures and part to overbuilding during the bubble years.  The third factor is continuing high unemployment (U-3 unemployment is running at 9.5 percent, while a broader measure of unemployment, U-6, is running at 16.5 percent).