Subsidies Boost Home Prices More Than Expected

Low interest rates and reduced inventory levels continue to bode well for the housing market, as home prices increased more than expected in October.

Compared to the previous month, the S&P/Case-Shiller index of property values in 20 cities increased 0.7 percent on a seasonally adjusted basis in October, stronger than the 0.5 percent rise expected by economists. Las Vegas and San Diego logged the best one-month improvements, jumping 2.4 percent and 1.7 percent, respectively. Overall, 17 of the 20 cities in the index showed gains.

Prices also showed increases year-over-year. The S&P/Case-Shiller index gained 4.3 percent from October 2011, the biggest one year advance since May 2010 and better than the median forecast of 30 economists in a Bloomberg survey that projected a 4 percent gain.

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The best performing cities on an annual basis were Phoenix, Detroit and Minneapolis with price surges of 21.7 percent, 10.0 percent and 9.2 percent, respectively. San Francisco was close behind with an 8.9 percent gain. Meanwhile, New York and Chicago both declined more than 1.0 percent.

Is the housing recovery really gaining strength…

David Blitzer, chairman of the index committee at Standard & Poor’s, explains, “Looking over this report, and considering other data on housing starts and sales, it is clear that the housing recovery is gathering strength,” according to Reuters. He adds, “Higher year-over-year price gains plus strong performances in the Southwest and California, regions that suffered during the housing bust, confirm that housing is now contributing to the economy.”

Although many see the report as more proof of a strong housing recovery taking place, the index of 20 cities actually declined 0.1 percent on an unadjusted basis from the prior month. Excluding the seasonal factors, home prices in 12 of the 20 cities fell between September and October. Furthermore, low interest rates induced by the Federal Reserve and a lack of supply is acting as a subsidy for the real estate market.

Last week, the National Association of Realtors announced the country’s total inventory of existing homes for sale fell 3.8 percent to 2.03 million units in November, representing a 4.8 month supply at the current sales pace. It is the lowest housing supply since September 2005. Meanwhile, raw unsold inventory reached its worst level since December 2001. According to Freddie Mac, the national average rate for a conventional fixed-rate 30-year mortgage declined to a record low 3.35 percent in November, compared to nearly 4.0 percent in the same period last year.

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