Prices increases in the latest Case Shiller report are down to a rate of 8% per year in July from 23% in March. A trend line using the last four months data produces a price decrease with the September data. The year over year growth that Case Shiller emphasizes, shows a 12.4% increase, but this misses the increase from a 5% growth in June 2012 to the 23% peak. The chart below demonstrates the risk using a 12 month average to project data that has grown rapidly and then collapsed. Monthly data has embarrassing quirks but it is the only reliable approach.
Prices in the more expensive markets are declining more rapidly than the 20 city average. These markets are more volatile... They went up faster in reaction to higher mortgage rates and they will come down faster.
It is common to talk about higher mortgage rates causing prices to grow more slowly. However the following chart demonstrates that the impact of higher mortgage rates has yet to hit. The July data is based on May price negotiations. The 30 year mortgage rate in May was 3.5%. But the current rate is 4.5%. The impact of the higher mortgage rates will not appear until next month’s report on June negotiations which were driven by a half point rise in mortgage rates. Since the trend lines do not include the impact of higher mortgage rates the decline in price will be greater than indicated above.
In the current case, higher FHA loan limits were reinstated, increasing prices beginning in November 2011. This surge died off in May 2012 but then the lower mortgage drove the prices to the peak seen in March. The surge in prices is an example of Fed Governor Jeremy Stein’s warning about the risks chasing higher yield. Prices have been falling because investors’ appetites dropped as rising house prices made single family homes less attractive. Next month the higher mortgage rates will add to the downward pressure on prices.
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.
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 five straight months to 11%. The four cities that were the most stable during the bubble grew in July .by 7%.
The following Chart illustrates the relationship of Case Shiller 20 city and national to housing outside the Case Shiller cities (called Heartland). It 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.