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Why U.S. Housing Prices Aren’t Falling Off a Cliff

Click on the cities above to see how housing prices have changed from June, 2003 to June, 2011 according to the S&P/Case-Shiller Housing Index.

Data are in Tuesday morning from what may be the one reliable product coming out of Standard & Poor’s — the S&P/Case-Shiller Housing Index.

The headlines are positive, and indeed the S&P Indices press release is titled “Nationally, Home Prices Went Up in the Second Quarter of 2011.” And the lead paragraph seems to substantiate the hype: “the U.S. National Home Price Index increased by 3.6% in the second quarter of 2011, after having fallen 4.1% in the first quarter of 2011.”

Making Sense

A closer reading, however, reveals that when seasonally adjusted, the top 20 U.S. housing markets saw an average price drop of 0.1 percent. Statistically speaking, that would mean a housing market in stasis, not one that’s on the rise. And even if you dispute the accuracy of seasonal adjustment, as some analysts now do, the press release falls short of jubilation, noting that the index “still posted an annual decline of 5.9 percent versus the second quarter of 2010. Nationally, home prices are back to their early 2003 levels.”

A factor that may be keeping prices from dropping precipitously: fewer foreclosures. They were down seven percent in July, compared with June, and down 39 percent from last July, according to RealtyTrac Inc. The anecdata suggest that bank reluctance is the explanation — robo-signer litigation would seem to be a factor discouraging eviction proceedings. Fewer foreclosures means fewer houses glutting the market and thus driving down prices.

Personally, as I’ve traveled around the country this summer, what I’ve been struck by is not the proliferation of “house for sale” signs but the abundance of empty storefronts — in big cities from New York to Providence and Boston to small ones, both depressed (Galion, Ohio) and supposedly thriving (Needham or even Wellesley, I’m told, in Eastern Massachusetts). I keep wondering if what Amazon.com founder Jeffrey Bezos told me on camera 12 years ago has finally begun to materialize in a big way: the passing of bricks-and-mortar retailing.

Of course it may just be the continuing effects of the Great Recession. Or so argued economist Robert Lerman as I pointed out empty storefronts on one of Boston’s busiest shopping strips, Boylston St. between Arlington and Berkeley. But if the Internet is finally taking its toll on retail space, I wonder about all the retail real estate loans on the books of America’s banks, and the Retail Mortgage Backed Securities sold to investors. Low interest rates are surely a mitigating factor, but if too much unaffordable housing was the cause of the Crisis, could a retail overhang have a similar effect? Just wondering.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions _Follow Paul on Twitter._