May 18 2007 4:57AM | Permalink | Email this | Comments (0) |
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A persistent rise in home prices, even if very small, is a necessary condition for new home construction to start rising again. This would bring back a few speculators, permit some strapped homeowners to sell their way out of a mortgage they can not afford rather than be foreclosed and encourage some households with existing homes that it again safe to list their current home for sale and buy a new home with minimal risk of being stuck with two mortgages for an extended period.

So it was encouraging that first quarter home price reports showed a 3% increase from the fourth quarter both from the National Association of Realtors (NAR) for existing homes and from the Census Bureau for new homes. But a price series generally considered to be accurate reports a 1.4% decline in median home prices for the first quarter (average of January and February only). So it not yet clear if home prices are rising. It is more likely that they are still falling.

The S&P/Case Shiller Home price index avoids the “mix” problem by creating an index from the resale prices of homes that were previously sold. Both the NAR and Census indexes currently have a significant upward bias because relatively few low cost homes have recently been sold after the abrupt tightening of mortgage approval standards for financially marginal mortgage applicants. The repeat sales home price index is used at the Chicago Mercantile Exchange as the basis for futures and options contracts for home prices. Current price quotes for futures contracts show that the financial market expects a further decline in home prices.