House Price Growth: Dallas (NOT Phoenix) Leads the Way

Following 19 consecutive months of year-over-year declines, house prices registered their twelfth consecutive year-over-year increase in May. Over this twelve month period, the S&P/Case-Shiller House Price Index – 20 City Composite grew by 12.2% on a not seasonally adjusted basis while the 10 City Composite rose by 11.8%. House prices in Phoenix registered their 9th consecutive month of year-over-year returns above 20.0% in May, rising by 20.6%. House prices in San Francisco (24.5%), Atlanta (20.1%), and Las Vegas (23.3%) also experienced year-over-year house price growth above 20.0% in May.

Rapid house price appreciation since the housing bust has received much attention, and based on this Phoenix has often been identified as a leader in housing market recoveries. But recent rapid price appreciation is a more nuanced phenomenon than this suggests. Housing markets currently experiencing the most rapid price appreciation tend to also be the markets that fell the farthest from their peaks. In contrast, markets with slower current house price appreciation, for example Dallas, are reaching new peaks in house prices, suggesting a more credible claim of market recovery.

The increase in house prices from the trough following the housing bust is highly correlated with the decline in house prices from the peak during the housing boom. As Chart 1 illustrates, house price growth following the housing bust has been strongest in cities that experienced that largest house price declines. According to the chart, Las Vegas and Phoenix were among the areas that experienced the largest peak-to-trough declines. These cities are now among the leaders in house price growth according to the S&P/Case-Shiller House Price Index – 20 City Composite.

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An alternative method for evaluating housing market recovery is to examine current prices relative to their peaks. The Dallas and Denver markets are reaching new house prices highs precisely because their price appreciation swings were less extreme during the boom and bust cycle. Chart 2 shows the relationship between the depth of house price declines and the current state of recovery. Comparison of Charts 1 and 2 confirms that the markets with the slowest growth (Chart 1) also tend to be closer to their peak prices (Chart 2).

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Despite larger year-over-year price gains, current house prices in Phoenix are at a level last seen in June 2004, before the boom and bust cycle played out. This indicates that Phoenix homebuyers who purchased a house between then and 2011 when prices hit bottom are more likely be underwater on their mortgages. Meanwhile, house prices in Dallas, which have grown at a slower pace have surpassed the boom peak that was reached in August 2006 suggesting that homeowners purchasing a home at the boom peak of the Dallas housing market are likely to have experienced house price appreciation and be above-water on their housing-related debt.

Chart 3 further illustrates that the Dallas market has far less to recovery from and is a stronger, healthier market than Phoenix, despite (if not because of) slower house price appreciation.

For full histories of the composites and 20 markets included in the S&P/Case-Shiller composites, click here cs.

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