Case Shiller 2012 June Shows Home Prices Bottomed But With High Unemployment, Will It Stick?

The S&P/Case-Shiller index shows home prices in June 2012 increased for the top 20-cities it tracks.  Housing prices increased from the same month a year ago which is the first time there has been such an increase since the summer of 2010.  This is the second time in a row that each city in the index posted month-over-month gains which suggests the housing market may have found a bottom.  Investors are taking advantage of the steep discount in home prices along with low mortgage rates but with high unemployment, it’s doubtful that these price gains can be sustained with 42 consecutive weeks of unemployment and increased interest rates.  Real estate investors are usually the first to move and put a floor on housing prices then individual buyers tend to follow them after they see prices stabilize.

The gains in housing are not yet getting transferred to the overall economy because most individuals aren’t taking part in the housing price bottom and aren’t able to take out loans on their homes with many recent homebuyers still owing more on their mortgage than their house is worth.  Investors are participating less than in previous months but the average homebuyer hasn’t yet returned to the market. Long-term, the housing price growth rate seems to be one factor that will help stabilize the U.S. economy that is plagued by low-income growth and high unemployment.

Jobs Are Still Problem

We are more concerned about jobs growth now that the housing market is showing strength and the Fed’s dual mandate has little to do with home prices directly.  This could impact their decision to move on QE3.

We expect initial jobless claims to continue below trends that would show the U.S. economy is expanding.  The August unemployment rate could revert back to the mean of roughly 85,000 new jobs added and an increase of 200,000 jobs monthly would not be enough to move the needle on the growth rate which we expect to stay above 8 percent.

We are still bullish on equities but we would like to see more participation from small caps.  Apple is holding onto price gains which may give the August 2012 rally more room to move higher.