Standard & Poor’s and Case-Shiller reported that house prices continued to rise in August. According to the release, both the S&P/Case-Shiller House Price Index 20-City Composite and the 10-City Composite rose by 12.8% on a year-over-year not seasonally adjusted basis, the largest increase in house prices since February 2006. House price gains were largest in Las Vegas, 29.2% and San Francisco, 25.4%. Meanwhile, house prices in New York saw the slowest growth, 3.6%, over the previous 12 months.
Standard & Poor’s calculates tiered house price indexes for 16 of the 20 MSAs included in the House Price Index – 20 City Composite. Tiered indexes measure changes in the value of existing single-family houses in three price tiers – low, middle, and high. Each tier represents approximately one-third of the sales transactions in each respective market. A previous post illustrated that house prices in the lowest tier tend to be more volatile than house prices in the middle and upper tiers; house prices fell further during the housing bust and have grown faster during the housing recovery.
However, this spread between growth rates among house price tiers stands in marked contrast to the historical performance of house prices. It is also a distinguishing factor between cities where house prices have recovered and areas where house prices are still recovering. As Chart 1 illustrates, while house prices across all three tiers declined following the housing bust, house prices in the bottom third of the Phoenix house price distribution fell the most and subsequently rose the most.
At the bottom of the housing bust in April 2009, the annual rate of decline in low tier house prices was 58.4%, while the annual rate of decline for house prices in the middle and upper tier was 34.9% and 27.6%, respectively. In April 2010, the annual pace of growth in the low tier was 26.3% while it was only 2.9% and 1.9% in the middle and high tiers. After leading the decline in April 2011, the annual rate of increase in the low tier has exceeded the growth rate in the middle and high tiers. As of August 2013, the spread has narrowed somewhat as the annual rate of increase in the low tier was 30.7% the annual increase in the middle and high tiers was 23.1% and 15.2% respectively.
In contrast, house prices across all three tiers in Denver have changed at more similar rates. According to Standard and Poor’s/Case-Shiller, Denver house prices set a new record high in August 2013. As Chart 2 illustrates, although house prices in the low tier fell more than house prices in the middle and high tiers over the housing bust, the difference in the year-over-year rate of decline was not as wide as the spread in Phoenix.
At its depth in March 2008, the annual rate of decline in the low tier was 10.8%, while the annual pace of decline in the middle and high tiers was 5.2% and 3.5% respectively. At their post-boom peak, the annual rate of increase in the low tier reached 17.6% while the annual increase for the middle and high tier was 10.5% and 7.8% respectively. In August 2013, the annual rate of growth in the low tier was 12.9%, while it was 10.9% and 8.7% in the middle and high tiers.
Chart 3 shows the spread in the growth rate between the high tier and the low tier for 3 cities where the house price decline and recent house price growth have been most pronounced, and for Denver, where house prices recently set a record high. According to this chart, the relative parity of house price growth across tiers before the housing boom and the disparity during the bust (widening of the spread) suggests that one indicator of normalization of house prices in a market would be a return to parity in growth rates across the tiers and a narrowing of the high-low spread. As Chart 3 illustrates, the 2012-2013 inter-tier price movements significantly widened the spread, especially in Phoenix, Las Vegas, and San Francisco, indicating that the high and low tier growth rates were diverging. The recent 2013 narrowing of the spread (except for San Francisco) indicates the high and low tier growth rates are converging.
For full histories of the composites and 20 markets included in the Case-Shiller composites, click here cs.