Wednesday, April 1, 2015

House prices are Driven by Economic Perceptions


House prices are driven by the perception of the economy.  Disappointing economic news makes buyers negotiate harder for lower prices. This has  probably happened already, but deals negotiated in March will not be reported until the week before the fourth of July.  Prices in 2014 grew at 4.5% down from two thirds from 2013 despite a better economy, because of the euphoria in 2013 about the housing. recovery. Price growth in more expensive markets declined more than lower priced areas. Government moves to lower down payments and mortgage costs will support higher prices but prices in 2015 may not continue to grow at twice the growth in salaries seen last year.

The 20 City index released in March, increased by 4.6% year over year for January closings, up from 4.4% for December which can be seem with the green line in the following chart.  Standard and Poor’s likes the year over year comparison because it masks the variability in the monthly data. David Blitzer of S&P says “monthly data reveal slowing increases”. Untrue, the last 4 months have been above 10% annual growth with the last 2 months at 11.4%. Blitzer knows that April through September 2014 saw negative growth.  He also understands that if the current 11.4% rate continues next two month’s year over year numbers will be 4.6% and 4.4% - flat and declining.  To keep the index creditable, he has to ward off expectations of growth that can’t be achieved, without explaining the monthly variability. Case Shiller data is excellent, It revels the variability in the data which is key to understanding pricing, but which S&P believes confuses the customer. 


   
Will double digit growth continue? That’s unlikely.  In the short term the price growth is driven by economic growth and the consumer expectations that it generates. In March the Michigan index of Consumer Expectations dropped 22% and the estimates of first quarter GDP are declining- the third weak first quarter in a row.  February closing data will probably be good because the deals were negotiated in January. But later months closings will be impacted by weather and declining expectations. April closings should definitely be down as they were in 2013 and 2012. Alas, April classing data will not be available until the week before the fourth of July. 


House prices in the short and medium term are not driven by increases in employment and the economy. The data demonstrates that market is driven by the potential for price appreciation   House prices fell for three years, before picking up in 2009 with the house purchase tax credit and other government programs. 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 table below demonstrates the drop in prices growth in 2014 compared to 2013 for each of the 20 cities in the Case Shiller index. The index is grouped by cities that move is similar patterns. It is in order of the price growth in the expansion that peaked in 2006.  The cities that are most volatile dropped the most. The California cites grew at 20.6% in 2013 but only 6.3% in 2014, While the cities that grew the least in the bubble the stable cities grew 8.8% in 2013 and 6.4% in 2014. The California cites growth declined by 70% while the stable cities growth declined by 27%.  


In 2015 I expect the trends will continue that growth will be lower than 2014. I also expect that in the higher priced cits, growth will decline more than the lower priced cities. House affordability is a bigger problem in Los Angles than Dallas.  However, Government actions can increase housing prices. The lower down payments and lower FHA premiums will boost prices.  The question is can these actions offset the trends in 2015. They can’t in the long run.

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