The housing recovery will not be steady or reach all regions. Monthly data contains a price surge in reaction to higher FHA loan limits which artificially increased 2012 prices. As months with the sharpest growth drop out of the year over year average, it will decline. Three California cities make up 27.4% of the index. In December these cities grew at 1.6% while the other 17 cities averaged 0.4% growth, for index growth of 0.9%. These trends are discussed in more depth below.
Monthly data makes it possible to understand price trends but this seasonally adjusted data has its quirks. The February Case Shiller data covers the first batch of December house closings but most prices were agreed to in October. This reporting lag is enough to forget what happened when the commitments were made. FHA loan limits were cut in October 2011. Buyers and sellers rushed to close while financing was available at the higher limit, lowering prices. Lobbying by real estate interests not only succeeded in reinstating the higher limit but also increased it in lower priced regions in November - triggering the January 2012 price surge.
Prices rose in reaction to the easier financing and then dropped as usual, but they went back up in the last three months. The current Case Shiller 12 month price growth is measured from December 11 when prices were declining. So as the low months drop off the 12 month average will increase until March and then fall. This is illustrated in the projection below which adjusts the 12 month data for the months that are added and dropped.
After December the 0.6% monthly growth of the add month is an assumption. The three cities in California (Los Angeles, San Diego and San Francisco) averaged 1.6% last month. Five months ago the California cities averaged 0.6%. California is an unusual market - 73 % of buyers believe housing will increase in value over ten years compared to 20% of sellers. First time sellers are 56% of the market and 44% are moving to lower cost states. Some of the sellers are looking to close in 2012 to avoid higher capital gains taxes. This appears to be an asset bubble driven by low interest rates and low down payments. The December growth is 20% per year. That level is unsustainable and it should slowly decline in the coming months. House price increases are not always good news. The difference in monthly growth rates is illustrated below:
The California cities experienced the highest price growth, an average of 330%, from the start of the bubble in 1997. The decline from the 2006 peak was predictable. That decline for the 20 cities correlates to peak price, income and housing wealth at 92%.
The decline was slowed by the $8000 house purchase credit which was seen beginning in May 2009 and the FHA loan limits. Since then the California cities prices have increased 13. The tax credit and FHA limits ended the downturn but left some cities with a house price level that makes them uncompetitive. The California cities price is 220% above the start of the bubble. Usually this elevated price leads to a long slow decline. For example, New York, which did not grow as quickly in the bubble with firmer financing and lower expectations for growth is in a slow price decline. It is one of the 6 cities in the Case Shiller 20 that are slowly declining.
Seven of the 20 cities have prices that are below the price at the start of the bubble plus inflation. The Case Shiller 20 cites represent 54% of the nations’ housing wealth. Outside these cities are regions that have prices that are depressed which should experience good growth. It is all: location, location, location, and timing.