Optimism, Albeit Guarded

As 2009 winds down, two pieces of good news released yesterday are significant for homeowners. The first is that for the fifth consecutive month home prices rose in October, according to the Standard and Poor’s Case-Shiller Home Price Index. The second is that according to the Conference Board, consumer confidence has edged back up to 52.9% in December for the best showing in three months. This rise was predicted by the 3.6% gain in retail sales for the 2009 holiday shopping season compared to last year’s dismal results. Consumer confidence is essential to lift home prices. What is a mortgage but a bet on the earning power of a borrower’s future? Let’s look deeper.

The S&P Case-Shiller index is a snapshot of housing prices in 20 of the nation’s metropolitan areas. On a seasonally adjusted basis, prices rose 0.4% in just 11 of these regions. Homes sales consistently fall in the fall. When the seasonable adjustment is removed, prices remained flat. Much of the markets’ health can be attributed to the first time home buyer’s tax credit which had been due to expire.  Potential market weakness was acknowledged by David M. Blitzer, Chairman of the Index Committee at Standard and Poor’s, “Coming after a series of gains these data are likely to spark worries that home prices are about to take a second dip.” Blitzer goes on to cite that price gains are dampened by “fears that the market will be swamped by a wave of foreclosures.”

Another factor to keep in mind is that worth of housing stock has been buoyed by the Federal Reserve Bank buying up mortgage backed securities, a process that has made homes more affordable through lower mortgage interest rates. This central bank intervention is due to end in March. The homebuyer tax credit will soon expire, only extending to contracts signed by April 30. Home sales typically grow with the spring, so the timing here is good, but the question remains: Will the housing market have strong enough legs to sustain the end of these two government supports?

Regionally home price trends are diverging. In San Francisco values have improved for seven months in a row; five months for Los Angeles and Phoenix. That hard hit Arizona city showed the biggest month over month increase, up a full percentage point. Over the last three months, prices in New York, Boston and Portland rose less than 2%. The biggest month to month declines were in Tampa, -1.6%, Chicago, and Atlanta -1%; Cleveland and Charlotte -0.7%.

Although the price drop there was minimal at -0.1%, Las Vegas is still in trouble . Home values there have fallen for 38 months in a row and are now barely above what they were at the start of the decade.

According to the Conference Board, while consumers rated their present economic circumstances at a 26 year low, they are more optimistic about the  future. The board’s Expectations Index rose to 75.6, the highest number in two years.

In 2010, expect home values to increase modesty for the year, if the employment picture improves. There will likely be hiccups along the way as government props are removed from the housing market. Remember that the equity you’ve built in your home is not just financial, it’s emotional. Simply because your home value has dropped from its peak does not mean that its utility has diminished. If you’re in a neighborhood you love, with a floor plan that works for you and a convenient commute, you can take heart from favorable signs that your primary investment is on a slow road to recovery.  If your economic circumstances remain dire in a depressed market, you might want to consider a short sale or deed in lieu of foreclosure to get out from under, instead of a refinance or loan modification to stay in your home.

You can also expect that the price volatility of the last few years will put a damper on owners tapping home equity with a line of credit as readily as they get cash from an ATM.

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