Morgan Stanley Sees San Francisco Housing Double-Dip, NYC Gains

San Francisco home prices declined in May and New York values rose even as the S&P/Case-Shiller Index showed the opposite, according to Morgan Stanley.

San Francisco prices fell 1.2 percent while New York gained 0.8 percent in May, Morgan Stanley said in a report, which looked at homes that weren’t in foreclosure or involved in a short sale, in which a buyer pays less than the amount owed on the mortgage and the bank agrees to take a loss.

Short sales increased by 30 percent nationwide over the past year, destabilizing the housing-price indexes, said Oliver Chang, a U.S. housing strategist at Morgan Stanley who co-wrote the report. Proceeds from short sales are 15 percent to 40 percent more than foreclosed homes, driving up S&P/Case-Shiller indexes even when values of non-distressed homes are falling, Chang said.

“There’s a price premium you can get from a short sale,” Chang said in a telephone interview. “That makes it look like prices are going up when they’re not.”

San Francisco home prices rose 1.8 percent in May from April, according to the S&P/Case-Shiller index of property values, which measures all sales. San Francisco’s gain reflects both a decrease in the number of distressed sales as a share of transactions and an increase of short sales among distressed sales, Morgan Stanley said. San Francisco prices have gained 21 percent since reaching a low in March 2009, according to the Case-Shiller index.

‘Complete Picture’

Taking apart sales data, as Morgan Stanley did, gives a distorted view of the market, said Karl Case, co-creator of the S&P Case-Shiller indexes, and a former economics professor at Wellesley College in Wellesley, Massachusetts.

“We don’t think it’s right to pull out distressed sales,” Case said in a telephone interview. “You don’t get a complete picture.”

Demand has declined since April, the deadline for homebuyers to sign contracts to qualify for federal tax credits worth up to $8,000. An index of pending home resales dropped 2.6 percent in June from the prior month to a record low since the index was created in 2001, the National Association of Realtors reported Aug. 3.

New York area prices increased in May because short sales and foreclosures accounted for a stable share of the market, Morgan Stanley said. Its report analyzes single-family home data, most of which is outside Manhattan. The median price of a Manhattan apartment rose 7.6 percent to $899,000 in the quarter ending June 30, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said July 1.

Chicago, Dallas, Los Angeles and Washington are other cities where values of non-distressed homes have declined as the property indexes increased, Morgan Stanley said.

“We expect actual home price performance to weaken further,” the Morgan Stanley report said. “Our analysis was performed on May home price data, which were affected by the strong gains in sales due to the expiration of the tax credit. With the weakness in sales that has since ensued, we expect home prices to weaken as well, further contributing to the double-dip effect we can already observe.”

To contact the reporter on this story: John Gittelsohn in New York at johngitt@bloomberg.net.

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A house in San Francisco

Erin Lubin/Bloomberg

A for sale sign marked sold hangs outside a house in the Seacliff district of San Francisco.

A for sale sign marked sold hangs outside a house in the Seacliff district of San Francisco. Photographer: Erin Lubin/Bloomberg

Aug. 5 (Bloomberg) -- Mark Vitner, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, talks with Bloomberg's Rishaad Salamat about the outlook for the U.S. economy and housing market. Consumer spending, pending home sales and factory orders were all weaker than projected in June, showing the U.S. recovery lost momentum heading into the second half of the year as employment stagnates. Household purchases, which account for about 70 percent of the economy, were unchanged from May, according to figures from the Commerce Department issued Aug. 3 in Washington. (Source: Bloomberg)