Recovery may be fading after summer gains in US

Los Angeles: US home prices increased in September for the fifth consecutive month, a closely watched national index showed, but the scant improvement suggests that the nascent housing recovery may be fading after a summer of steady gains.

Brisk sales fuelled by low interest rates, inexpensive properties and a popular tax credit for first-time buyers helped bolster home prices this summer.

Now, the resiliency of that rebound is a matter of debate among economists and housing analysts. Soaring unemployment and foreclosures figure to weigh on the market for months, several said.

"Things are going to cool off. The economy is still weak. This tax credit surge is kind of done. The foreclosure situation is getting worse by the day," said economist Christopher Thornberg, a principal with Beacon Economics in Los Angeles and an early predictor of the housing bubble.

"The rally in this housing market has been driven not by fundamentals but by government policy, and that is inherently a short-sighted process, and it just can't go on like that forever," Thornberg said.

Home prices in 20 metropolitan areas rose a seasonally adjusted 0.3 per cent in September from the prior month, according to the Standard & Poor's/Case-Shiller index. That comes after a 1.1 per cent rise in August.

Tax credit

Eleven of the areas saw prices rise in September on a seasonally adjusted basis, down from 15 in August.

Compared with September 2008, the Case-Shiller index fell 9.4 per cent, marking the first time in 21 months that the 20-city composite index didn't register in double digits.

Earlier this month Congress extended the $8,000 (Dh29,379) tax credit for first-time home buyers through April, raised the income limits and expanded it to include a $6,500 incentive for some buyers who already own a home.

Housing analysts attribute part of the recent rebound to buyers rushing to take advantage of the credit before its initial expiration today. Some analysts now question whether enough buyers remain to keep the market moving.

Dean Baker, co-director of the Centre for Economic and Policy Research in Washington, said he expects the tax credit's extension will do little to fuel a rebound.

Data released last week by the Mortgage Bankers Association suggest that a steep drop in sales is on the way. The group's Market Composite Index for the week that ended November 13 showed a 2.5 per cent seasonally adjusted drop in mortgage loan applications from a week earlier, while refinance applications slipped 1.4 per cent in the same period.

Applications plunge

Purchase applications plunged 4.7 per cent from a week earlier. It was the sixth consecutive weekly decline, bringing purchase applications to the lowest level since November 1997.

"We had people rush to buy homes and now there is very little buying in the market, and so my guess is that we will start to see prices turn around again," Baker said.

Foreclosures also are a growing concern. The Mortgage Bankers Association reported last week that a record one in seven US home loans was delinquent or in foreclosure as of September 30 and that foreclosures are likely to keep climbing through all of next year. That could increase supply and lead to declines in prices.

Home buyers in October snapped up 6.1 million previously owned units, the fastest pace since February 2007, the National Association of Realtors said.

The expansion of the tax credit to include some current homeowners probably will spur some sales, though many are likely to come from downsizing, said Cameron Findlay, chief economist at LendingTree.com.

Prices to erode

Still, he expects home prices to erode by 5 per cent to 7 per cent from their current levels next year. The uncertain job market will also weigh heavily on potential buyers, he said.

"What's my monthly income, and how much is my monthly mortgage payment going to be?" are likely to be questions driving buyer mentality, Findlay said. "Three years ago they were willing to take the risk, and today they are on the other end of the scale, and they are saying, ‘I don't want any risk.'"

Some, however, were optimistic.

"This report is a bit more mixed than the previous month. We had some very strong performance in June, July and August. This one is a tiny bit soggy; it is not quite as impressive," said David Blitzer, chairman of the S&P index committee. "It doesn't mean we are about to turn around and take a big nose dive, but we are probably going to have more modest growth."

Home prices across the US in September were at similar levels to what they were in autumn 2003, according to the index.