The Case-Shiller U.S. National Home Price Index, reported by S&P Dow Jones Indices, rose at a seasonally adjusted annual growth rate of 8.4% in November, unchanged from October. In the first eleven months of 2017, home price appreciation was 6.0% on average, slightly higher than 5.3% of 2016.
The Home Price Index from the Federal Housing Finance Agency (FHFA) rose at a seasonally adjusted annual rate of 4.9% in November, slower than 7.1% in October.
The figure below shows the year-over-year (YOY) changes in home prices and disposable personal income from 2000 to the present. Compared to the seasonally adjusted annual growth rate (shown in the above figure), year-over-year changes are less volatile. The blue line represents the YOY changes in home prices; the red line represents the YOY changes in disposable personal income; the gray area shows the difference between the changes in home prices and the changes in disposable personal income.
As the figure illustrated, between January 2000 and August 2006, home prices grew faster than disposable personal income. Especially, when home price appreciated and disposable personal income decreased, the gap between the changes in home prices and the changes in disposable personal income became even wider. As an example, in December 2005, when home prices rose by 13.5% and disposable personal income decreased by 0.6%, the gap became the largest one before the recession.
Between September 2006 and July 2012, as home prices dropped sharply, the differences between the changes in home prices and the changes in disposable personal income remained negative. In February 2009, home prices decreased by 12.6%, the largest drop since 1988, while disposable personal income increased by 1.0%. Moreover, disposable personal income decreased between May 2009 and May 2010, but not as much as home prices.
Between August 2012 and December 2013, housing market has been recovering with big increases in home prices, however, disposable personal income has been decreasing for the entire year of 2013 and dropped by 4.8% in the last month of 2013. In December 2013, home price appreciation along with decreases in disposable personal income makes the gap between the changes in home prices and the changes in disposable personal income reach the highest level (15.4 percent points) since 2000.
After that, home prices have decelerated in 2014 while disposable personal income increased faster. By November 2014, home prices rose at the pace of 4.6%, on a year-over-year basis, and disposable personal income increased by 4.9%, surpassing home price appreciation.
However, the situation that disposable personal income grows faster than home prices only lasts six months. Since May 2015, home price appreciation has outpaced the YOY changes in disposable personal income again. During the first ten months of 2017, on average, home prices rose 5.8% on average and disposable personal income rose 1.1% on average. Although house price appreciation exceeds income growth, the gap between the two does not match the differences that prevailed during the housing boom.
However, interest rates have begun to rise rapidly, though the increase is from historically low levels. While historically low rates are helping to offset the faster appreciation of home prices relative to incomes, a higher mortgage rate would erode affordability under these conditions. In addition, previous NAHB analysis suggests that the change in rates over a short period of time matters for new home sales. NAHB will continue to watch as these housing demand conditions evolve.