Economists predicted that the Case Shiller 20 city index would grow by 0.7% this month. Instead it grew by 1.2%. The forecasts were an indication of the price trend, but the Case Shiller cites vary substantially by month. The following chart tracks the last 12 months of monthly prices changes adjusted to an annual rate. The 1.2% rate is equivalent to 16% annual growth. In the last 12 months the Case Shiller has shown substantial variation, but the trend line shows a decline of half a percent per month.
Forty percent of the difference from forecast is attributable to Detroit, which appears to be on its way out of bankruptcy. Prices grew at a rate of 3.7% - an annual rate of 55%. Another problem is that closings come in over three months. The prices of closings that come in the first month will differ from average of the first and second months and change again in month three. This difference can be substantial. The seasonal adjustments are small but they also are a source of error.
This is not a new issue. Months like this lead Case Shiller to promote year over year price comparison to make the data appear more creditable. However this data is misleading. The recent year over year numbers have been more influenced by large swings in 2013 than those in 2014. This month the index rose 1.2% from 0.8%. But the Case Shiller year over year index went down because March of 2013 was so much higher. It is very misleading.
Prices should grow at a lower rate in the coming months. The price growths of more expensive markets such as the 3 cities in California which make up 27% of the index are falling. Los Angeles was 358% of the start of the expansion while Dallas was 135%. Dallas affordable housing has helped growth while Los Angeles growth is poor. Price growth in Los Angeles is declining because prices are unsustainable. Los Angeles prices are twice the inflation adjusted level that they were in 1997. Prices for the Case Shiller index are 150% of 1997. The Case Shiller trend is 10% which is twice the rate for the nation. Most of that national growth is in the Case Shiller cities. The Case Shiller gives the appearance that prices are stronger than they are. A drop in these cities could cause national indexes which get little attention to turn negative and get attention causing house buyers to postpone purchases.
For example, in cities like Columbus, Ohio, which did not grow rapidly in the housing bubble, prices grew 3.6% in the first quarter, an annual rate of 15%. Yet prices adjusted for inflation are 80% of the price at the start of the bubble in 1997. Prices have room to grow but purchasers could be impacted by reports of a national price decline.