Yes, this morning the June Case-Shiller numbers came in better-than-expected this morning, but that doesn’t mean it’s time to get real bullish on real estate. We mentioned tha tax credit expiry earlier.
Here’s more from Duetsche Bank:
The Case-Shiller 20 city home price index rose 0.3% in June following a 0.5% increase in May. 10 cities showed price declines, with the sharpest drops occurring in Denver (-1.0%), Las Vegas (-0.9%), Seattle (- 0.8%), Phoenix (-0.6%) and San Francisco (-0.6%). This compares to four cities registering declines in May and three in April. In not-seasonally-adjusted terms, only one region posted a decline, similar to the pattern in May. The expiration of the homebuyers’ tax credit is likely to blame for some of the fading breadth of price gains. The sharpest increases occurred in Washington, DC (+0.9%), Chicago (+1.2%), Detroit (+1.7%), Minneapolis (+1.0%) and New York (+0.7%). The year- on-year rate of change for all 20 cities was +4.2% vs. +4.7% previously. Prices are up in year-on-year terms in 15 cities, compared to 13 cities previously. No doubt this is a positive development for households since real estate is the single largest asset on their balance sheet.
Based on what we know for Q2, household net worth should rise (+$500 billion), thus marking the fifth quarter in a row of gains. Those increases could come to an end this quarter if home prices flatten out and stock prices continue to slide. Where housing goes from here will depend largely on the labour market, as home affordability is close to a record high and banks are starting to ever so slightly ease standards on mortgage loans. Bank lending standards would likely be eased substantially further if the economy generated strong job gains because that would make loan officers more comfortable extending credit.
Unfortunately, we do not think the labour market is going to show much improvement in hiring when the employment report for August is released this Friday. We are projecting a +40k increase in private employment (Headline payrolls are estimated to be down -65k because of Census-related layoffs.) The unemployment rate is expected to move up 0.2% to 9.7% because of a rising labour force participation rate due to the extension of unemployment insurance. If the job market turns down, meaning we start to see flat to negative private payrolls, then the improvement in Case-Shiller home prices is likely to be short- lived. Declining home prices would feed negatively back into consumer confidence and likely dampen spending as households would be inclined to further lift their saving rate.