Monday, February 2, 2015

House price upside in 2015

“Home Price Gains Continue to slow”, is the headline on Standard and Poor’s January 27th Case Shiller report.   David Blitzer chairman of S&P’s Index Committee stated: “With the spring buying season and spring training season still a month or two away, the housing recovery is barely at first base. Prospects for a home run in 2015 aren’t good”.  Typically vague, but data on page 4 of the report contradicts Blitzer.  Seasonally adjusted prices for the 20 cities in the last 2 months grew at 0.7% per month, an annual rate of 8.7%, double the 4.3% annual number Blitzer relies on.  Is it churlish to point out that the latest data is for the November closings negotiated in September?  September is a long way from the spring market. Blitzer says that seasonally adjusted data is not as reliable as unadjusted Case Shiller data. He does not explain why.  Could it be that if the seasonally adjusted number forces the question of what happened - a question that neither David nor S&P are comfortable addressing?  If you do not know what happened last year, how can you accurately forecast the next year. You can’t. That is why forecasters have gotten house prices wrong for the last 4 years.

What is good about the Case Shiller?  The data on the 20 cities is the most accurate available. Analyzed carefully it is a rich source of information to understand price trends. Using this data   I project those prices in the Case Shiller 20 cities should increase by 5% and possibility more in 2015. These cities are expensive and most are high riced relative to the where they were at the start of the housing bubble. Nationwide the prices should increase 7%. Some of the lower priced areas will see growth of 10%. Even within the 20 cities, price growth will vary sharply.

The chart below illustrates the seasonally adjusted month over month growth of the Case Shiller 20 city index, along with a three month moving average.  
.This year’s results are more confusing than ever.  With the data for April 2014 closings, the index dropped sharply, turning negative with the May closings. Most of the sales that closed in April were negotiated in February. The spring market saw sharply lower prices, but sales that closed in August (negotiated in June) began an improvement.

Personal Income along with the inherent volatility of the city drives the price changes. Personal income growth in fourth quarter 2013 was only 0.1% above the prior quarter.  For the year, it only averaged 2.0%. The GNP was negative in the first quarter of 2014. In a volatile city like Los Angeles prices are heavily driven by investment considerations, in a city like Dallas people are really buying a house.   Over a period of years this relationship correlates at above 90%. In a single year particularly 2014, 70% is as good as it gets. 

The fourth quarter’s low income  and first quarter negative GDP was the result of winter storms but it carped off a very low growth year caused by tax increases, and the sequester.  By 2014 fiscal policy was positive and the economy was strong with the first three quarters having income growth of 3.6%.  But the 2014 spring market showed the effects of the low income growth as buyers were very cautious on house prices.

The following chart illustrates the result of a correlation of income and the house prices in the beginning of 2014 as a percent of those at the beginning of the expansion adjusted for inflation (a measure of inherent volatility).  Los Angeles grew at 4.6% annually in the first 11 months. The correlation predicted a growth of 5.4% - 0.7% above the actual result. There are several outliers. Miami, Tampa and Las Vegas grew well above the projected rates. Resort communities tend to shrink rapidly in a recession and grow more rapidly in the recovery.  Growth in Phoenix and Minneapolis grew slower than projected.   Historically growth in both cities is choppy.

The big weakness in this approach is the delay in personal income data by city which will not be available until November of the following year.

The following chart illustrates the outlook for the twenty cities. These cities are grouped by cities in the order of the growth in the expansion from 1997 to 2006.  So the cities are grouped by cities that perform similarly to changes in income.

Personal Income in Los Angeles grew at 2.2% in 2013. It is very volatile with real prices 200% above the start of the housing bubble. The average home is $645,000. By comparison Dallas is 122% above the start of the bubble and the average price is 36% of Los Angeles. Prices are lower because it is easy to build new homes while it is difficult to build in Los Angeles.  The high prices make Los Angeles at risk for declines as businesses move to lower cost areas. Dallas and Denver are also at risk because of the concentration of Oil industry.

The resorts are growing rapidly as they do in a growing economy. Despite Miami’s price level of 146% of the start of the expansion it still has room to grow. Tampa and Las Vegas are lower risk. The only large city with consistently high growth is Seattle, with its high technology industry.  New York has seen prices grow slower than inflation. Washington prices have surged as lobbyists flocked in, but its growth has slowed with budget pressures.  Atlanta and Charlotte were hard hit by the rescission but the prices are low and the income is recovering.   

 The average annual growth house price in the first 11 months of last year was 3.7% while the growth in the last 2 months is 8.7%.  I would work off the 11 month numbers and move it up to approximately 5% for the Case Shiller cities.  Obviously there are large uncertainties. The data in the next few months may lead me revise the number, most likely upward. With more work it is possible to forecast individual cities with reasonable accuracy.  

The Case Shiller cities are expensive and well above the level at the start of the housing bubble. Lower priced areas will see greater appreciation. In the first three quarters of 2014 the FHFA nationwide expanded price index increased 6.2% vs. 3.4% for the twenty cities. Case Shiller has a National index but that only covers selected urban areas. The data is good but it is not representative of the nation.  The nationwide price increase for 2015 should be about 7% with some areas outside the Case Shiller growing at 10%.  

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