House Prices Have Room to Grow, For Real


House price growth has been slowing in recent months, but still remains well above the rate of general inflation. For instance, annual growth in the S&P/Case-Shiller 20-City Composite home price index eased for the sixth consecutive month in May to 9.3% while the Federal Housing Finance Agency’s (FHFA) Purchase-Only house price index slowed to a 5.6% increase. Both these measures were well above May’s 2.1% yearly increase in consumer prices. Among the 20 metro areas, 18 exhibited slower rates of annual growth in May than April with only Tampa and Charlotte showing moderate acceleration. In addition, according to a panel of 49 economists in July, the median forecast of growth in the FHFA index for 2014 was 4.7%, even lower than May’s figures, and 3.8% in 2015.


Economists often think of prices in “real” terms, i.e., adjusted for general inflation. Although home prices in the West North Central and West South Central Census divisions appear to have recovered from the housing bust, real prices are still below their peak as seen in the figure below. In fact, real prices in all nine divisions and the U.S. as a whole have not yet recovered from the drop in house prices. As house prices were falling, overall consumer prices mostly rose (averaging around a 2% annual rate) eating away at real home prices.

May Prices

There were two major factors affecting the declines in real house prices: The severity of the drop in nominal prices and the length of the decline where general inflation cut away at real prices. The Pacific division saw the largest drop in nominal prices (-46.2%) followed by the Mountain and South Atlantic divisions as the table below shows. Meanwhile, New England suffered the longest period of decline (81 months), and then both the East North Central and Mid-Atlantic divisions. It should take longer for those areas to recover those losses. Areas that experienced more moderate housing bubbles, such as the West South Central division, will regain their declines more quickly. The Mid-Atlantic division is the most recent area to recover and hence the slowest to catch up to the rise in consumer prices. In order for real house prices to recoup the losses seen during the crises, nominal price growth needs to exceed the rate of general inflation which is currently happening.

May Prices2


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


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


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  1. House Prices Have Room to Grow, For Real

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