House Prices in May – Volatile Prices? Blame Sales

The S&P CoreLogic Case-Shiller US National Home Price Index (CS) was released today. The index has been moving up steadily since hitting a housing bust low in late 2011. But the pace of increase has varied over the ensuing 53 months. Analysts track house price growth in a number of ways: the index (equal to 100 in January 2000) rose from 136.7 in December 2011 to 179.4 in May of 2016, the monthly change between April and May was 0.2%, or 2.3% on an annualized basis, and the index is up 5.0% since last May. Understanding trends in house price growth, and their likely path in the near term benefits from examining all these perspectives.

Figure 1 shows the index level (blue), the annualized change (red) and the year over year change (green). The index level shows the trajectory but is arguably imprecise. The annualized percent change is more precise but difficult to discern a trend from. The year over year change shows smoother trend growth but misses the turning points and flat spots in the index level. Thus each measure has some information but some limitations.

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But the path of house prices is not determined by its own trend or idiosyncrasies, the pace of existing home sales matter. Given that home sales are a lengthier transaction than other sales, home prices take more time to adjust to market conditions. Figure 2 adds an index of existing home sales to Figure 1. In this graph existing home sales are pulled forward two months to illustrate  the lag between sales and price dynamics.

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In recent years the volatility in the pace of home prices is well represented by the ebb and flow in the pace of existing home sales, dips to near zero in early 2014, 2015 and 2016, followed by reacceleration. The Case-Shiller price data in today’s release was through May, but the sales data currently available through June, suggests momentum and further acceleration in home prices when the June data is released next month.



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