Wednesday, August 28, 2013

House Price Increases Cut in Half in 3 months

The Case Shiller year over year price increase showed a modest decline dropping from 12.2% to 12.1%.  (I projected that it would be in the 12.2% to 12.0% range.)   In June 2012 Case Shiller prices increased at an annual rate of 5% in March they reached 23%. They have fallen to 11% in the latest report with June data.  A trend line using the last three months produces a zero price increase in the August data. The year over year gain is illustrated in the chart below in orange.  Anyone using this data to project the future will be in a whole lot of trouble. Monthly data has embarrassing quirks but it is the only reliable approach.  

 It is common to talk about higher mortgage rates causing prices to grow more slowly. The problem is that the impact of higher mortgage rates has yet to hit. The June data is based on April price negotiations.  The following chart indicates that the rate in April was 3.5%.  But the current rate is 4.6%.

 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.  This surge died off in May but then the lower mortgage drove the prices to the peak seen in March.   
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 fifth straight month to 14%. The four cities that were the most stable during the bubble grew in June by 5%.
The following Chart illustrates the relationship of Case Shiller 20 city and national to housing outside the Case Shiller cities (called Heartland) 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 June national annual price increase is 9% per the FHFA purchase only index.

 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%.
Prices can be expected to turn negative and some Case Shiller cities will be particularly hard hit.  Mortgage rates FHA loan limits and other government programs drive activity in expensive market while they have a lesser impact on lower pieced Heartland regions.  The hot markets will resume   declining to a long/ term sustainable price level.