Home Price Appreciation Continues in July


S&P Dow Jones Indices released the Case-Shiller U.S. National Home Price Index for July. The report indicates that house price appreciation continues.

The U.S. National Home Price Index rose at a seasonally adjusted annual growth rate of 5.7% in July, following the 4.4% rate of growth in June. The Home Price Index released by the Federal Housing Finance Agency (FHFA) confirmed both the increase and acceleration in house prices. According to the FHFA Home Price Index, house prices rose at a seasonally adjusted annual rate of 2.0% in July, faster than the 1.7% increase in June.

The dashed line in Figure 1 is the trend line, indicating the upward trend of home prices from 1991 to now. During the housing boom, home prices were above the trend line; during the housing bust, home prices dropped below the trend line. Currently, home prices moved along with the trend line and are slightly above it.

A previous blog post indicated that the increases in the market value of households’ real estate are contributing to an expansion in owners’ equity in real estate. Since buyers of new home are typically “trade-up buyers”, the equity in their current home can be used to finance the purchase of a new home. However, the shift in the composition of housing equity by age groups suggests that the expansion in housing equity may have a larger impact on home improvements.

In general, homeowners can be separated into two groups by the presence of a mortgage. The first group includes homeowners without mortgages, they own their home free and clear. Analysis by the Federal Reserve Bank of New York found that, “44% of total net housing wealth is held free and clear” and “properties owned free and clear tend to be held by older people — 64% of this wealth is held by people over 60 years of age, a figure which has held basically constant since 2005.”

The second group is comprised of homeowners with mortgages. The analysis by the Federal Reserve Bank of New York pointed out that the majority of equity held in mortgaged homes resides in the hands of homeowners 60 and below. However, the figure below, adapted from the table produced by the Federal Reserve Bank of New York researchers, shows the change in the distribution of home equity in mortgaged homes over the last decade. Between 2006 and 2016, even though mortgaged homeowners 60 and below still hold the majority of home equity, the share of equity in mortgaged homes owned by those 60 and below has declined. In contrast, the equity in mortgaged homes held by owners above 60 has risen by 15 percentage points to 36% in 2016.

A back of the envelope calculation taking into account the share of owners’ equity held by those above 60 both in properties with no mortgage and mortgaged properties suggests that owners above 60 years of age hold 48% of housing equity. These owners may have a growing preference for aging-in-place as opposed to selling their current home and buying a new home. On the one hand, a greater preference for aging-in-place would lessen the likelihood that an owner 60 or above would use their home equity to purchase a new home, lowering both the existing home inventory levels and sales of new homes, and instead increase the possibility that the home equity would finance spending on home improvements.

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