Housing: 'Better' doesn't mean 'good'

(breakingviews.com) -- Is the U.S. housing market approaching bottom? The rate of decline in U.S. house prices moderated in February. Prices fell 2.1%, according to the Case-Shiller composite index of ten cities.

That sounds like great news for housing-hobbled banks. After all, real estate prices are a key factor in the stress tests the biggest banks are undergoing, right? Not so fast.

Better isn't synonymous with good. The decline is less dramatic than January's 2.6% fall, but it's still an awful figure. Prices have fallen 18.8% over the past year, according to the index.

But let's be optimistic an say the moderation continues, with prices gradually approaching a bottom. The improvement was half of one percent in February (that's to say a 2.1% decline instead of a 2.6%).

Now assume the rate of decline slows to a quarter of a percent in March and continues this trajectory. At the end of the year, prices would be 19% lower - worse than the baseline case under the stress tests.

And while the idea that price declines are moderating makes sense - prices cannot fall to zero - the evidence they are is feeble.

One month doesn't make a trend, even for a journalist or desperate realtor. Spring is also the busiest time for selling homes, so prices tend to be a bit stickier than they are at other times of the year.

Finally, the worst declines in February predominantly took place in cities where prices have fallen the most. For example, home prices in Phoenix have already fallen by more than half from their peak. They fell another 4.5% in February, according to Case-Shiller. That seems to point to a trend that hasn't yet petered out.

Home prices will eventually reach bottom. But it's not yet in view.