Wednesday, November 27, 2013

Linear trend line indicates 2014 house price decline

The Case Shiller data released on November 26 is based on September closing prices negotiated in July.  Because the Thanksgiving report covers deals negotiated on the 4th of July the current inventory levels and mortgage rates have no impact on them. Prices in the three California cities (Los Angeles, San Francisco, and San Diego) grew at an annual rate of 38% in April but are now growing at 16%.  Prices in the 20 city index grew at 13%.  The growth in the current reporting period came from large cities where prices tend to be stable.  If three stable cities did not grow at an increased rate last month the index would be flat.  These cities are New York, Boston and Detroit. (The Detroit suburbs are growing nicely.)  This growth pattern is unusual.  Next month will tell whether this growth was caused by buyers rushing to avoid the possibility of future mortgage rate increase.   It is likely at a trend line calculated with the next month’s data will be more negative 
A trend of the last 5 months is shown below. The Three California cities trend is converging with the 20 city trend.  The trend line for the 20 city index results in a decline at of 13% by yearned 2014. The average decline for 2014 reporting would be 7%.  This is illustrated in the graph below. The monthly scale is based on the month of closing, not reporting.

Source: Case Shiller
Historically in regional housing cycles a contraction would end with the prices adjusted for inflation back where they were at the beginning of the cycle. California and most other cities in the Case Shiller index are above that level. Low interest rates and FHA financing with as little as 3% down have kept these prices above the historic levels.  The surge in prices is an example of Fed Governor Jeremy Stein’s warning about the risks chasing higher yield
Prices were declining in 2001 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.  Prices have been falling because investors’ appetites dropped as rising house prices made single family homes less attractive, partially in California. The price swings reflect an unstable market in Metro areas.  FHFA prices which are more reflective of the national price grew 8% in the third quarter compared to 11% in the Case Shiller.  Most areas outside the Case Shiller index have prices that are where they were in 1997 adjusted for inflation when the bubble started. These prices will be stable. That cannot be said most cities in the 20 city index.