House Price Growth Shows Signs of Normalizing

The recent release by the Federal Housing Finance Agency (FHFA) shows that its measure of house prices, House Price Index – Purchase Only, rose by 5.3% on a 12-month seasonally adjusted basis in November 2014. This marks the 34th consecutive month of year-over-year growth. Over this period of more than two-and-a-half years, house prices have risen by 19.0% and have now surpassed their October 2005 level.

Similarly, the recent release from Standard and Poor’s (S&P) and Case-Shiller indicates that their measure of house prices, the House Price Index – 20 City Composite, rose by 4.3% on a year-over-year seasonally adjusted basis. This is the 30th consecutive month of year-over-year increases in the house price index. Over this period of two-and-a-half years, house prices have risen by 19.8%. This version of the S&P/Case-Shiller House Price Index is now just above its April 2005 level.

According to the S&P/Case-Shiller 20 City Composite House Price Index, year-over-year house price growth has been slowing in recent months. In each month between December 2011 and November 2013, the 12-month change in house prices was higher than the previous month. Year-over-year house price growth peaked at 13.2% in November 2013. However, as Figure 1 below illustrates, since that time, year-over-year house price growth has slowed.

Presentation1

In addition to metro-wide house price indexes, Standard & Poor’s also calculates tiered house price indexes for 16 of the 20 metro areas 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.

According to analysis of the tiered house price indexes, growth is slowing amongst both the low-tier and high-tier house prices, but the decrease in growth is more pronounced for homes in the low-tier. Consequently, the gap between house price growth in low-tier homes and high-tier homes is shrinking. Moreover, the decline in this gap is typically greatest in metro areas where the gap between growth in low-tier home prices and growth in high-tier home prices was originally the widest.

Figure 2 illustrates these points. According to the chart, the x-axis represents the difference, in percentage points, between the maximum year-over-year growth rate in low-tier house prices between December 2011 and November 2013 and the maximum year-over-year growth rate in high-tier house prices between December 2011 and November 2013. The y-axis compares this gap to the one, the percentage point difference between the 12-month growth rate in low-tier and high-tier prices, measured in November 2014. For example, in Atlanta, the maximum 12-month growth rate in low-tier house prices was 43 percentage points greater than the maximum year-over-year growth rate in high-tier house prices (shown on the x-axis). In November 2014, the difference in the growth rates of low- and high-tier house prices had shrunk to 12 percentage points, a 31 percentage point decline (shown on the y-axis). In New York, the gap has reversed and now price appreciation in high-tiered home prices slightly exceed growth in low-tiered home prices.

The gap between house price growth in low-tier homes and  high-tier homes is shrinking. Moreover, the decline in this gap is typically greatest in metro areas where the gap between growth in low-tier home prices and growth in high-tier home prices was originally the widest. A previous post first brought attention to the gap between house price growth in low-tier homes and high-tier homes, noting that the gap between price appreciation in low-tier and high-tier homes was inconsistent with the historical trend, and that the closing of this gap would signal a return to normal house price growth. The figure below shows that the gap between low-tier and high-tier house price growth is shrinking, suggesting that house price growth is normalizing.

Presentation2

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

For full histories of the FHFA US and 9 Census divisions, click here fhfa.



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