Home Prices Continue Gradual Rise, but is Calling a Bottom Premature?

There was general agreement on the increase in home price levels in May in data released from by two different sources this morning.  The Federal Housing Finance Agency's (FHFA) House Price Index (HPI) showed seasonally adjusted home prices up 0.8 percent from April to May and 3.7 percent over the last 12 months while Radar Logic's RPX Composite Price rose 0.7 percent from April and 2.6 percent year-over-year.    

On a non-seasonally adjusted basis the HPI was up over 1.5 percent in May.  FHFA also revised its previously reported 0.8 percent increase in April down to a 0.7 percent increase.   The Index is now 17.0 percent below the peak it hit in April 2007 and is roughly the same as its level in May 2004. 

The HPI increased in eight of the nine census divisions with the exception, the West South Central Region (Oklahoma, Arkansas, Texas, Louisiana) declining, off 1.0 percent.  The other regional increases ranged from +0.5 in the Middle Atlantic Region (New York, New Jersey, Pennsylvania) to +1.7 in the Pacific division (the coast, Hawaii, Alaska).  Eight of the nine census divisions are in positive territory on an annual basis ranging from an increase of 0.5 percent in the Middle Atlantic to 6.3 percent in the Mountain division (Montana, Idaho, Wyoming, Nevada, Utah, Colorado, Arizona, New Mexico.  The ninth census division, New England, is unchanged since May 2011.

FHFA's index is calculated using purchase prices of houses with mortgages sold to or guaranteed by Fannie Mae or Freddie Mac while Radar Logic tracks housing prices gathered from public sources. 

In analysis accompanying the report, Radar Logic said it views claims that housing prices have bottomed as premature.  "Those people looking at current results and calling a bottom are being dangerously short sighted," said Michael Feder, Radar Logic's CEO. "Not only are the immediate signs inconclusive, but the broad dynamics are still quite scary.  We think housing is still a short."  The company also said that it viewed reports of diminishing supply as "greatly exaggerated."

The RPX Composite price (reported on a per square foot basis) increased $14.27 (8.3 percent) from the beginning of 2012 through May 23, much more than the increases during the same period in 2009, 2010 and 2011, but called the rapid increase thus far in 2012 as "consistent with the hypothesis that mild winter weather temporarily boosted demand."  This will be reflected in an earlier seasonal weakness in demand, probably in May or June rather than in the usual July or August timeframe the company said.

Even if the mild winter theory doesn't play out, Radar Logic expects short-term appreciation to short-circuit longer term appreciation and perhaps even trigger further declines.  This would occur on the supply side as higher prices provoked both financial institutions and homeowners to put their properties on the market while on the demand side the higher prices may deter investors.