Good economic news is hard to come by these days, but a ray of light in the housing industry emerged earlier this month when it was revealed that housing prices had increased 3.6% in the second quarter of 2011, according to the S&P/Case-Shiller national index, the most reliable and highly regarded indicator of health in the housing sector. Economists are split on what this means in the long term—specifically, whether or not this signals that the housing recovery has arrived, or whether it is a momentary blip, and a full-blown housing recovery is still months or even years away. Here’s a look at both sides.
Side #1: The housing recovery has begun
A 3.6% increase in housing prices in one quarter is substantial in any market, but it is particularly compelling given that housing prices had fallen for three consecutive quarters, prior to the Q2 numbers. If we were experiencing a small blip caused by market anomalies, we would anticipate a much smaller increase. Furthermore, the S&P/Case-Shiller national index is not the only index to pick up on the trend. A separate city-by-city index found a 1.1% increase in June alone (the last month for which data has been collected), which means not only are prices increasing, but the rate of increase is accelerating. Finally, the percentage of investment-driven real estate deals is increasing. Investors are always the first to smell a recovery, and they are coming back in droves. These are textbook recovery conditions.
Side #2: The housing recovery has not yet begun
While the 3.6% increase is promising, it must be placed in context of sagging values for the last several years. Prices are still down almost 5% year-over-year, and from a statistical standpoint, substantial increases are less significant when they are preceded by substantial decreases. More importantly, data reflecting increasing prices was collected in June. Since then, we have endured a credit downgrade, GDP downward revisions, and a European debt crisis. Whatever seeds of growth were planted in the early summer were trampled on by mid-August. Expect prices to return to a downward skid in the next quarter.
Scoring the debate
No matter what side you come down on, one thing is clear—prices have upward pressures for the first time in a long time. This is good news for homeowners. However, it is also true that bad news in the global economy threatens to counteract the positive movement experienced in the last quarter. Ultimately, a housing recovery is inevitable, though it’s timing remains up in the air. We should know more when Q3 numbers are released in November.