Wednesday, August 27, 2014

Case Shiller Prices Decline this Quarter

 Standard and Poor’s press release Tuesday headlined “Widespread Slowdown in Home Price Gains”.  Standard and Poor’s prefers to measure growth from year to year, which for the 20 city index is 8.1%.  That includes a great first quarter, two good quarters and the last quarter which is -1.6%. Yearly numbers avoid the monthly swings but knowing that house prices are falling is worth dealing with data issues.   The decline in the Case Shiller should increase in the following quarters. The seasonally adjusted monthly growth annualized is shown in the chart below.

This period of growth is one of the mini cycles since the peak in June 2006.  House prices fell for three years, before picking up in 2009 with the house purchase tax credit. When the tax credit ended the prices fell in 2010. The market reacted to restoration of lower FHA loan limits in November 2011 and rebounded, peaking in May 2012.  Prices declined in June but the euphoria about price increases led investors and buyers to pile in, creating a peak in February 2013.  The investors started to leave at that point and rate of price increase declined. The growth of prices during this 2 year period is shown in the table below. The cities are in order of the growth in the 9 year expansion from June 1997 to June 2006. They are grouped by cities that move in a similar pattern.

The three California cities grew by 39% with the tech fuelled economy driving San Francisco growth to 49%.  The resort cities collapsed rapidly but have recovered to grow at 32%. The 20 cities grew 25%.  However, excluding the California and resort cities the growth would be 18%.
Most of the cities that have the highest growth in this period will decline. Prices are driven by building limits and local economics.  I can demonstrate these relationships statistically and forecast price level for each region. Having worked in building products I have seen the long slow expansions and long painful contractions. House prices for the Case Shiller will continue to decline for the next few years. Some cites will see price growth but others will face years of decline.  Government programs helped improve results in the short term but stretched out the contraction in the long term.  We are now entering that long term.

The Case Shiller Index represents 29% of the national supply of single family housing. It contains the most volatile and most expensive cities which have driven national trends. This decline in the Case Shiller does not mean that nationwide house prices decline.  Most of the regions with the 71% of single family housing units should experience price growth at a sustainable level.  So it will be a two track market.