Early signs house prices may be stabilizing

In an article I wrote on May 2nd, ("Why your house price isn't crashing,") I explained a major flaw in how the financial media report on housing prices - the fact that they aren't measuring the price of the same home over several points in time.  They typically report on the change in average sales price for an area using sales data from the National Association of Realtors, which leads to some bad conclusions.  A better measure of house prices is the House Price Index (HPI) from the Federal Housing Finance Agency (FHFA).

Today's HPI index report shows that housing prices declined a mere 0.3 percent for the first four months of 2009.  What makes this report a better measure of housing prices is that it is a "repeat-sales index, meaning that it measures average price changes in repeat sales or refinancing on the same properties."  In other words, when a house is sold or refinanced, they compare that appraisal value to the appraisal the last time the same house was sold or refinanced.

Have housing prices bottomed and will they turn up from here?  It's difficult to predict where prices will go next.  As shown in the chart below, there are still many homes financed with adjustable rate mortgages whose interest rates will reset at higher rates, peaking at the end of 2011.  On top of that, unemployment is still rising, so we can expect more foreclosures.

Yet it's estimated that investors and banks are sitting on a lot of cash waiting for signs of further economic stability and ultimately, good investments.  With all of that money looking for investments, housing prices could stabilize further if investors believe prices are close to the bottom and a recovery has begun.  Many indicators show many of the world economies are in much better shape today than at the end of 2008.  Short of another crisis in the capital markets, we could begin to see an economic recovery yet in 2009.  If that happens, it could bode well for housing prices.