The Case Shiller index grew at 1.2% in February - an annual rate of 14%. As the Fed pushed mortgage rates lower, the FHA loan limits, which were cut to fight the housing crisis, were scheduled to be raised. 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 limits but also increased them in lower priced regions. Prices rose in reaction to the easier financing reaching a peak of 1.1% in April 2012. Then growth tapered off 0.3% as the impact of the lower limits wore off. But by then, housing was viewed favorably so lower mortgage rates now drove prices.
The mortgage rate correlates at 70%. It would a better fit were it not for the run up in price from April to June of 2012 in reaction to the FHA limit increase.
The effect of the lower mortgage rates differs sharply by city (Metropolitan Statistical Area, MSA) as can be seen in the follow table. Los Angeles grew from beginning of the expansion in 1997 until 2006 at an inflation adjusted growth of 282%. The real price is now at 169%. The price decline from the peak in June of 2006 until the house purchase credit and lower FHA limits in May 2009 reporting correlates with the gain from the start of the bubble in 1997 to 2006, income growth, and city size at 92%.
The Subtotals are cities that change in similar patterns throughout the cycle. They are summarized below:
- · Prices in the three California cities increased to 266% and it is currently at 161% above start of the bubble. Prices fell 5% in 2012 but rebounded 13%. Growth in the first two months of 2013 was 21% annualized.
- · The Resort cities lack of income growth caused them to drop quickly to a sustainable level until the current low mortgage rate raised them in 2012.
- · The depressed cities were overvalued but slowly contracting until 2012.
- · The recovered cities grew rapidly last year but from a low base. Phoenix grew 23% last year but it is still only 107% of the level at the start of the bubble.
- · The stable cities barely saw a bubble. Denver grew rapidly because it was depressed at the start of the bubble. Prices in Dallas barely moved.
Growth in the Case Shiller Cities could have peaked. California growth was flat in the last 3 months, but this was offset by higher growth in the depressed cities. It is very possible that Case Shiller growth will be less than the 14% annual rate in the first two months. National annual growth is 8%.
The Bulk of the nation’s housing is outside the area covered by the Case Shiller Index. It is the least effected by the Fed’s low rates and it is 84% of pre bubbles levels. The California cities have an average price of $626,000 -268 % above the national average. They also grew more rapidly in 2009 with the house purchase credit. So the prices of the markets that are above the average price receive the greatest increase from government programs to help housing. Outside the Case Sheller 20 City markets, which includes major metropolitan but is more rural, prices are one fifth of the California cities. While the California cities grew at 21% those in the areas not covered by the Case Shiller index grew at 3%. The inventory shortage that is widely discussed is concentrated in California. The bulk of US housing is in markets with a large supply of housing.
Markets such as California are no longer competitive with other parts of the county, so business is slowly moving to lower cost areas. California income growth is low and unemployment is high. As investors swarm in they look at house prices at the low point and it looks attractive. Long term, these prices are not sustainable. Bidding up house price will lead to future long slow decline.
Tighter credit standards are nice but as price levels drop strategic defaults will rise as prices correct. While housing is now a positive contributor to GDP, the goals of prosperity from reflating housing are not achievable. Housing is not the great investment it looked like in the boom years so consumers will want less of it. Simpler homes and less elaborate remodeling.
Housing wealth the California and depressed cities in orange is $2.4 trillion above where it would be if the prices had grown with inflation. This number will grow as a result of low interest rates. These cities are 61% of the index and are 150% above the real price at the start of the bubble. The remaining 13 cities are 96% of the pre bubble price. The government action to correct housing resulted in a two tiered market. The sooner the Mortgage rates return to a sustainable level the less future pain in housing and lower the losses on the government guaranteed mortgages.