S&P Dow Jones Indices reported that the Case-Shiller U.S. National Home Price Index, which uses prices of existing homes, rose at a seasonally adjusted annual growth rate of 8.4% in October, slightly slower than the 8.5% increase in September. The September increase was revised down from its original estimate of 9.0%. Meanwhile, the Home Price Index, released by the Federal Housing Finance Agency (FHFA), rose at a seasonally adjusted annual rate of 6.5% in October, following a 6.1% increase in September.
Changes in home prices can affect housing affordability. All else constant, home price appreciation can lower affordability, while decreases in home prices can raise it. Figure 2 presents the changes in home price annual growth rates and the Housing Opportunity Index (HOI) from 2000 to the present. The Housing Opportunity Index (HOI) is defined as the share of homes sold that would have been affordable to a family earning the local median income taking into account home prices, income, and mortgage rates.
As shown in Figure 2, during the housing boom, home price appreciation accelerated contributing to the decline in the HOI, which decreased from 63.7% in September 2003 to 40.4% in September 2006. Between 2006 and 2012, home prices registered consistent declines, and affordability rose from 40.4% in 2006 to 77.5% by 2012, the highest level since 2000. In the past five years, home price appreciation has continued and housing affordability has slipped to 58.3% by September 2017.
Moreover, Figure 3 shows the relationship between home price annual growth rates and existing home sales from 2000 to the present.
As Figure 3 illustrates, between 2002 and 2004, as home price appreciation accelerated, existing home sales increased by 15.9% from 5,220,000 to 6,050,000. Between 2005 and 2009, existing home sales dropped by 37.1% from 6,200,000 to 3,900,000. Meanwhile, home price appreciation slowed from an annualized rate of 19.7% in March 2005 to 7.3% in March 2006, registering a decline in April 2006. Sustained declines in home prices began in March 2007.
By the end of 2008, home prices dropped by 17.7% at an annual growth rate. As home prices continued to fall, existing home sales remained low and were about 3,705,000 in 2010, on average, though it showed a noticeable upward trend in 2011. Although both home price appreciation and existing home sales have been volatile in recent years, sales of existing homes have trended upward, against the backdrop of home price appreciation.
The 2009-2012 surge in the Housing Opportunity Index (HOI) reflected more than one market condition. Driving the indicator higher, home prices were low or falling; most metro areas saw peak prices in 2006-2007 and bottom in 2011. Unfortunately, the labor market was in distress during this time and financing conditions were seriously tight, so there wasn’t much by way of burgeoning demand for homes. Robust growth in home prices amid dwindling supplies of homes for sale over the last several years has curtailed affordability and the HOI, though still positive, is on a declining track as a result.