March 26, 2013 / 11:26 PM / 5 years ago

Location crucial for the U.S. housing recovery

By Leah Schnurr
    NEW YORK, March 26 (Reuters) - By one measure, the U.S.
housing market turned a significant corner early this year:
Prices are on the rise everywhere.
    For the first time since the bottom fell out of residential
real estate beginning in the summer of 2006, all the 20 major
cities tracked by the closely watched S&P/Case Shiller Home
Price Index rose on a year-over-year basis in January, data
released on Tuesday showed.
    That is a significant milestone for a property market
recovery that has been characterized by inconsistent momentum
and spotty regional performances. On average, U.S. homes lost
more than a third of their value in the recession, according to
Case Shiller data, but some areas lost more than half their
value, while others barely registered double-digit declines.
    After marking what turned out to be two false bottoms in
early 2009 and 2011, the market turned the corner in early 2012,
and a host of data, from increasing new and existing home sales
volumes to a pickup in housing starts, suggest the recovery is
    "Definitely we're seeing more evidence of a rebirth of the
housing market," index co-creater and Yale economics professor
Robert Shiller told Reuters Insider. "The housing market is very
different from the stock market. (Prices) have momentum and when
they start going up, they generally keep going up for a year or
even more."
    But the fact that it has taken nearly seven years for all 20
metropolitan areas to show improvement at once belies the
fragmented nature of the comeback. For instance, Phoenix has
outperformed whereas Chicago remains a laggard.
    While it is a positive sign that the gains are widespread,
"The housing recovery does remain a bit uneven," said Stan
Humphries, chief economist at Zillow.
    "These appreciation rates we're seeing are certainly not
sustainable and I think are not good for the market in the
long-term. We're going to see a period of volatility in home
price appreciation until we clear out the negative equity and
until mortgage rates get back to more normal rates."
    Following is a look at some of the stand outs and laggards. 
   All figures were calculated using the seasonally adjusted
indexes from S&P/Case-Shiller.
    Miami and Tampa, the two Florida cities covered by the
index, both saw their home prices lose about half their value
during the course of their fall from spring 2006 to late 2011.
As of January, both cities were more than 40 percent off their
    Florida was slammed by a high level of foreclosures
following the housing meltdown, made all the worse by its
lengthy foreclosure timeline. In February, the state had the
highest foreclosure rate for the sixth month in a row, according
to RealtyTrac, with one in every 282 homes seeing a foreclosure
filing last month.
    More than 12 percent of all Florida loans were sitting in
the foreclosure process in the fourth quarter of last year, the
highest rate of any state, according to the Mortgage Bankers
Association, suggesting recovery will be a bumpy road for
    Homes in Phoenix saw their values more than halved during
the downturn and the sharp rebound since the summer of 2011 has
made the city the housing market's the come-back kid. Prices in
Phoenix have surged nearly 30 percent from their lows, the
biggest increase for any of the cities. That still leaves them
about 44 percent away from their highs.
    Phoenix's declines during the housing crisis are topped by
those of Las Vegas, where prices dropped over 60 percent. After
hitting bottom later than Phoenix did, Las Vegas has lagged its
counterpart's recovery, rising a little over 15 percent from its
low point. That still puts it more than 55 percent away from its
2006 highs. 
    What the cities have in common is substantial investor
interest as buyers have piled in to buy cheap properties that
can be fixed up and rented out. Investors purchased 22 percent
of home resales in February, according to the National
Association of Realtors.
    "This has become a speculative market, there's been a change
in our market psychology over the last 50 years," Shiller said.
    "People used to just take it for granted: 'When the time
comes, I'll buy a house.' Now they're thinking it's an iffy
thing: 'Maybe I have to jump in early or get out early.' So
especially in cities like Phoenix and Las Vegas, it's driving
that kind of sentiment."
    Having missed out on some of the excessive frothiness other
cities saw during the housing bubble, Dallas and Denver
experienced the smallest drop from their peak price levels.
Prices fell less than 10 percent in Dallas and just over 11
percent in Denver. 
    They are also the closest to full recovery. In January both
were about 2 percent away from their highs. 
    A big supporting factor for a healthy property market is a
steady job market and both the Dallas and Denver areas fared
better during the recession than the country more broadly.
    While total U.S. employment fell by 6.3 percent in the
recession, Labor Department data shows employment fell only 5.9
percent in Denver and by just 5.1 percent in Dallas. Moreover,
while the U.S. economy is still employing 2.2 percent fewer
people than it did before the recession hit, both cities now
have record high levels of employment and unemployment rates
significantly below the 7.7 percent national average.
    These two cities are being looked at as potentially the
"next Phoenix" because they hit bottom later than many other
cities and have a large number of underwater borrowers that
could make them attractive for investors, said Humphries.
    Bottoming in the early part of 2012, Chicago has gained less
than 5 percent since then, while Atlanta has bounced back more
strongly with a roughly 16 percent gain.
    A little over 28 percent of homeowners in Illinois were
underwater in the fourth quarter of last year, meaning they owe
more on their loans than their homes are worth, according to
CoreLogic. The underwater rate in Georgia was 33.8 percent,
putting both above the national average of 21.5 percent.

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