House prices fell modestly in July according to the Federal Housing Finance Agency (FHFA) with the release of their monthly purchase-only house price index (HPI), which was down 0.5% to 192.4. Included in the release was a revision to the HPI for June, down 1.2% to 193.4 – compared to a decline of 0.3 to 195.2 in the August release. The recent declines have neutralized the house price appreciation observed earlier this year, with the FHFA HPI increasing from 193.0 in February to 195.8 in May.
The FHFA HPI release presents the monthly price changes for the nine census divisions. A decrease in the HPI was observed in six divisions, with the largest declines observed in the South Atlantic (-1.6%) and Mountain (-1.5%) divisions. These divisions are dominated by states experiencing the weakest economic conditions and most affected by the housing market downturn (Florida, Arizona and Nevada). The Pacific (+1.1%) division experienced a moderate increase and slight increases were observed in the East South Central (0.3%) and Middle Atlantic (0.2%) divisions.
The trend in the FHFA HPI over the past six months is consistent with the trends observed in other housing market indicators (eg. housing starts and sales of new and existing units). The modest decline in the HPI in June and July reflects the withdrawal of the support provided by the home buyer tax credit. The tax credit stimulated stronger growth in housing demand in March and April, which also helped stabilize house prices. However, with the expiration of the tax credit at the end of April and the consequent downturn in housing demand (both new and existing – based on contracts signed) in May, June and July, a softening of house prices in June and July was expected.
On a positive note, the National Association of Realtors pending home sales index, (a leading index of housing demand based on contracts signed for existing home sales), ticked up in July. Contract closings (the reported measure of existing home sales) typically occur within two months of a contract being signed. Therefore, the improvement in the pending home sales index points to a strengthening of existing home sales from September. As housing demand recovers, house prices are expected to firm and return to their path of modest growth in the fourth quarter of 2010.