Wednesday, September 30, 2015

Case Schiller is negative for the last three months

How can that be, when the New York Times headline is “U.S. Home Prices Rose 5% in July”?  Both are correct.  The Chart below shows that the index is 5% above July 2014.  It also illustrates the surge in seasonally adjusted price that started in early 2012 and the current decline.  The last month of growth was April 2015.  The declines in average annual  compound growth ranged from 2.0 to 2.4%.  Negative growth also occurred in May through August of 2014 in reaction to weakness in the first quarter.  A similar pattern occurred this year.  It is possible that growth will resume in September or October.  However this year’s economic uncertainty could make buyers more conservative.  The longer monthly prices are negative, the more conservative buyers will become.


This chart demonstrates the wild swings in price growth that make forecasting so inaccurate.  While most buyers are looking for shelter, expectations of gain drives swings like this, not job growth or demographics.

The following table illustrates the average annual growth in the three years from April of 2012 to April 2015 in comparison to the average annual  compound growth rate in the last three months for the twenty Case Shiller cites.  These cities are grouped in order of growth during the bubble starting with Los Angeles which experienced the highest growth .  The market has changed but the grouping is still meaningful.
The growth of Los Angeles was 13% -Prices in the three years grew by 45%.  These prices are affordable only with low interest rates.  Prices in the last three months grew by only 1%.  Prices of the three California cities were flat compared to 14% in the three years earlier. The resort cities show a similar pattern. These two groups represent one third of the index.  Washington, New York, and Boston represents another third.  These cities grew relatively slowly (4 to 6 percent)  in the high growth years, but declined by 3.5% in the last three months. The low growth in these cities is a major change from the expansion that ended in 2006.  New York and Boston have Finance and Washington has government none which is growing.  Chicago experienced the sharpest decline in the last three months-13%. The Prospect of enormous tax increases will do that.   

New construction is focused on the high end of rhe market which is sensitive to price growth appreciation. The next three months will set the pricing pattern for 2016.  

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