Prices fall in expensive cities-rise elsewhere
Case-Shiller’s 20 city index grew 4.8% over the last year, but that consists of the first two quarters of growth and the last 2 quarters of decline. Prices fell off the cliff in the spring market. The seasonally adjusted index reached 173.4 in March and fell to 170.0 in September, The city results differ widely. However outside the 20 cities growth is rapid and sustainable.
The following graph illustrates the rise in prices in beginning the first quarter of 2012 and ending in the first quarter 2014. Income and job growth are better but prices are falling. Cities where houses are difficult to permit are volatile with expectations of price increases. In 2011 the scheduled reduction in government loan levels was repealed causing a booklet in prices. This triggered investors and other buyers to jump in and prices soared.
In mid-2013 the administration had to go to Congress to bailout the FHA trust fund so the mortgage fees jumped reducing the buyers. In unstable markets a marginal change in demand produces a sharp change in price because it changes the perception of buyers.
The price increase varies sharply by city depending upon the difficulty of building new homes to meet demand and changes in local income. The following chart illustrates the decline in each class of city. The cities are grouped by the growth in price during the expansion from 1997 to 2006. Growth in the volatile California cities fell from 25% in second quarter 2013 to -1% in third quarter 2014 – decline of 27 percentage points. In the stable cities growth fell from 8% to 5%- a drop of 2 percentage point. The performance of each city in shown is the chart and table below.
High house prices are good if you own a house but a high priced market will see an erosion of employment as companies locate elsewhere. So competitiveness generally brings prices down to where they were at the beginning of the bubble adjusted for inflation. This is a long slow adjustment. The reason for high growth in smaller cities is that they were below the real price at the start of the bubble. While the Case Shiller 20 cities are experiencing price declines the prices grew 25% above the level at the start of 2012.
The individual cites are affected by economics and the individual quirks that influence real estate.
The Case Shiller cities usually grow faster than the national average but not in the last two quarters. The National index implies a double digit growth outside the Case Shiller cities. If you rely on the Case Shiller national index you will see a different conclusion. That index is misleading because it is based on a sample of urban areas that does not match the national housing market.
The government decision to relax credit standards in the current low interest rate environment will increase prices most in the most expensive markets. However that means they have further to fall in the long term.