David Blitzer, Chairman of the S&P Dow Jones Index Committee, proclaimed that “Home prices continued to strengthen”. The Case Shiller index year over year growth increased 12.2% up 0.1% to the highest level since 2006. So how can price increases be declining? Easy, the year over year index is higher because prices in May of last year increased. Economists polled by Bloomberg expected three times the increase in the year over year growth. The chart below demonstrates that growth in 2013 is far above the 12.2% Case Shiller year over year growth. March price growth peaked at an annual rate of 23%. The California cities in the Case Shiller (Los Angeles, San Diego, and San Francisco) grew at 40%. In May the Case Shiller 20 grew at 13% and the California cities grew at 23%. A drop not foretasted by most economists.
Case Shiller is weighted by housing value. The 3 California cities make up 27% of the index and 12% of U.S. housing value. Despite the headline grabbing California growth, price increases differ sharply by city. Phoenix grew faster than California in January at an annual rate of 27%. It declined for the fourth straight month to 14%. The four cities that were the most stable during the bubble grew in May by 5%. Housing outside the Case Shiller cities represents 75% of the housing stock and is drastically lower priced. Inventories are over 10 months of sales. Prices outside the Case Shiller grew at only 5 %. The national inventory is 9 months vs. 3 to4 in California, and 7 months in the Case Shiller. The May national annual price increase is 9% per the FHFA purchase only index.
The Case Shiller 20 index highlights the surging prices in expensive markets. Media coverage of the hot markets leads to higher price expectations in other markets. The more expensive markets showed a greater response to FHA loan limits, house purchase credit and other programs. The California market has a long history of booms and busts. Buyers remember the peak and believe that these prices will return. With some good news the price stampede will begin. In the current case, higher FHA loan limits were reinstated, increasing prices beginning in November 2011 which continued in March 2012 negotiations – the basis of May 2012 reporting. This increased the May 2013 reported Case Shiller year over year number. The reporting lag is so great that economists forget what happened when prices changed. So, few analysts do try to understand monthly trends.
Increases in markets such as California are not driven by fundamentals. But price trends are predictable. The decline from the peak of the Bubble in 2006 until federal programs were launched in April 2009 correlated with the price growth in the expansion and personal income at 92%.
The May reported prices were negotiated in March, before the spring market, the recent higher mortgage rates, slowdown in investor purchase of homes, and recent increase in California inventories. With these conditions, price trends will continue to be negative.
Next month the Case Shiller 20 city average year over year growth is projected to be 0 % to 0.2% down – the first decline in 17 months. But prices will still be growing at an annual rate of 10% to 8% with a larger decline in California. The recovery will continue but prices will continue to grow more slowly and some of the hot markets will see price declines in the near future.