Housing prices continued on a steady upswing into 2013, a positive sign for local governments facing ongoing budgetary pressures.

The S&P Case Shiller 20-city composite index, which measures the value of U.S. residential real estate in 20 metropolitan areas, shows home values in January were up 8.1% from the year before - the greatest increase since the summer of 2006 when the housing market was at its peak.

The home price indices are calculated monthly using a three-month moving average and are published with a two-month lag.

"This recent trend is a positive development for local governments and investors can expect that budget situations could likely improve in coming cycles," said Tom Kozlik, municipal credit analyst at Janney Capital Markets.

In addition to lower state aid from state governments, local governments are also facing major pressures from lower property tax revenues, which were just starting to take effect from the drop in housing prices from a few years ago.

Kozlik explained that the effects from a drop in home values take a while to work their way through the local government budget process, usually three to four years. States don't follow the same three- to four-year lag since they aren't as dependent on valuations and property taxes.

"We have noted over the last few years that falling home values resulting in lower local government revenues would lag the overall economic recovery and that expectation has been accurate for the most part," Kozlik said. "We're just now getting into the point where the decline in values would have started to work its way into the budget cycles, which local government management teams would have to grapple with."

With the sustained increase in home prices, however, these pressures that local governments have been facing will be alleviated.

Still, since it takes time for property tax revenues to reflect higher home values and assessments, it could be some time before we see an improvement in these revenues among local governments.

Going forward, Kozlik said he believes housing prices will continue to recover.

While the housing market has improved for many local government issuers, the recovery is still uneven, with many areas still experiencing property valuations below mortgage levels.

"The uneven recovery in the housing market is a very regional trend," Kozlik said. "However, some of the regions that were hardest hit in the Great Recession are now seeing some 'pop' in property valuations."

He notes that cities like Los Angeles and San Francisco have been the beneficiaries of the recent higher property valuation data. Los Angeles experienced a 0.92% increase in home prices in the last month and a 12.12% increase in the last year, according to the Case Shiller index. San Francisco experienced a 0.14% increase in the last month and a 17.51% increase in the last year.

Every city in the index showed a year over year improvement in home pricing. Every city also saw month-over-month increases for January.

"This bodes well for the housing market in 2013," Chris Mier a municipal strategist at Loop Capital Markets, wrote in a recent report. "More importantly, the increased wealth effect will be a nice offset to the payroll tax increase and help people that are currently underwater on their mortgages."

There is still much room for improvement, as pricing in every city remains below pre-recession level highs.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.