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July 30, 2009

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US home price index shows increase

THE United States housing market may finally have turned around after three years, given the rise in the widely watched Case-Shiller home price index for May, the developers of the index has said.

The Case-Shiller home price index for May posted an increase of 0.5 percent on Tuesday, the first monthly rise since 2006, instead of a forecast 0.5 percent decline, though prices have tumbled more than 32 percent from their peak in the second quarter of 2006.

"This is much more important than an up day on the stock market. It may mean that we may have changed direction," Yale University economist Robert Shiller, one of the developers of the index, said.

After seasonal adjustment, prices showed a 0.2 percent decline, but this was still an improvement in the recent trend, economists said.

It is "a pretty significant indicator that we might be at or near a bottom," the other developer of the index, economist Karl Case, said.

Other recent signs of a housing market turnaround were seen in new home sales data for June which jumped 11 percent, the biggest monthly gain in eight years, the US Commerce Department said on Monday.

Existing home sales rose for the third straight month in June, the National Association of Realtors said last week, feeding optimism about the beleaguered housing sector.

Still, caution was warranted as long as the US unemployment rate and mortgage foreclosures keep rising, both Shiller and Case advised.

The upturn in the Case-Shiller index in May may be driven by seasonal factors, Shiller cautioned.

"I am worried that we'll have five or more years of a weak economy because we're seeing economic situations of fundamental uncertainty," Shiller said.

The lesson of the housing bubble is that preventative risk management must be a priority going forward, Shiller said. For example, changes to mortgage contract structure must be made to protect home-buyers in the event of a downturn.

But the US government bailouts of banks hit by losses on home mortgages in the past year may mean there will be less incentive for banks to engage in such risk management techniques, Shiller admitted. "The bailouts we've seen were extraordinary events that we want to prevent as much as possible in the future."


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