Wednesday, August 26, 2015

House Price growth slows to 2% to 4 %


Stepping back and looking at price growth over the last 12 months compared to the two comparable prior periods illustrates the declining trend.  This should not be a surprise; the Case Shiller 20 city index for June 2015 is at 179.9 which is 27% above the level 3 years earlier. Price growth declined an average of 33% in each of the last two periods. Projecting the same decline will result in a price growth of 3.2% which brings house prices to 30% above June 2012. Thus, this simple projection indicates growth of 2 to 4 percent can be expected of the next 12 months.  The weakness in this projection is that it does not incorporate an increase in mortgage rate or change in the economy but these should not have a dramatic effect on the next 12 months. Higher interest rates and a perception that house prices are fully or over valued could begin to have a negative effect on prices in late 2016.

                              Source: Case Shiller 20 city Index seasonally adjusted

While growth in employment and income affect prices, it cannot explain this surge.  House price growth first appeared in March of 2012 following action to make government mortgage rules more attractive to buyers in November 2011. The price growth peaked a year later. A big factor in price growth, particularly in 2012 and 2014, was the belief that housing was undervalued.    The growth in price has not been smooth but it has been declining steadily.

The following chart illustrates that this growth is not smooth. The Case Shiller price index released August 25 is for sales recorded in June and negotiated in May-a lag of almost four months.  By that time people forget what happened when the prices were agreed upon. If the economy is weak, buyers will be more cautious about offering too much so the price growth turns negative.  The winter of 2014 was cold and the economy was hurt leading to negative price growth in March through August 2014 closings. In 2015, negative economic growth in the first quarter led to negative house price growth in April through June recorded sales.

                            Source: Case Shiller 20 city Index seasonally adjusted

Some have speculated that the current stock market turbulence may make buyers more cautious therefore lowering price growth.  That may happen, but most of the third quarter closings have occurred or are under contract. Weakness in price from the market turbulence will not appear until the October closings which appear at Christmas. Stock market turbulence will not lower house prices unless the turbulence is prolonged or deep.  The next three months should average positive price growth at an annual growth 2 to 4% mirroring the improved economy since the spring.

The Table below compares the growth in the first and second quarters by city. Growth in the first quarter was at an annual rate of 12.3% which dropped to negative 0.8% in the second quarter. The cities are grouped by volatility. California price growth has typically been above average but these cities grew only by 0.1%. The only city that experienced more growth in the second quarter was Las Vegas.  Portland, Denver, Phoenix, Detroit, Los Angeles and Seattle were the only other cities growing faster than a 2.5% annual rate in the second quarter.
                                             Source: Case Shiller 20 city Index seasonally adjusted


Cities Such as San Francisco which were growing at incredible rates saw negative rates.  Others like Dallas that are usually stable grew at double digit rates corrected in the second quarterly. These results demonstrate the nationwide effect of changing consumer perceptions of the safety of a housing investment. Yes people buy houses because they need shelter and theythey love the house, but investment concerns are sufficient to drive house price swings.