posted on 14 September 2016
Volatility has roiled the U.S. and global financial markets for some time. June's Brexit vote, for example, was the most volatile day in the history of foreign exchange markets. Likewise, the huge influx of foreign capital drove longer-dated Treasury maturities to record lows. But one market seems to have escaped these gyrations: U.S. housing.
There are several different measures of volatility, but a common metric is the standard deviation in the metric of interest, in this case the year-over-year change in monthly home prices. Sounds intimidating, but it simply measures the degree to which the data fluctuates in relation to its average or mean over a period of time. While the 2000s were a rocky decade for housing, historically home price volatility had been muted  (Figure 1).
Over the last 40 years, home price volatility averaged 60 basis points, but over the last two years it has averaged 20 basis points. Over the past year it's been even more stable at only 10 basis points.
The last narrow band of years that exhibited such low home price volatility was between 1994 and 1997, but even then it was modestly more volatile then today. The mid-to-late 1990s was a healthy housing market that exhibited steadily improving sales, home price growth and low defaults. The low-volatility housing market of the mid-to-late 1990s helped anchor the economy through the 2001 recession. That was and still is the mildest post-war recession due, in part, because the real estate market helped buffet declines in economic growth and equities.
Which markets have experienced the most stable home prices recently? As of June of this year, Phoenix, AZ was the most stable home price market, followed by Raleigh, NC, Tampa, FL, Denver, CO and Los Angeles, CA. Each of these markets has exhibited stable home prices in 2016 due to a mix of healthy economies, steady demand and low inventories. By far the most volatile market is San Francisco, where home prices as of this June were up 4 percent from the prior year, but down 8 percentage points from a 12-percent increase just six months prior in December 2015.
While today many other asset classes remain turbulent, real estate prices have been an oasis of stability, and they are expected to remain stable in the short term due to very tight inventory of unsold homes and rising purchase demand. This is important because volatility is generally an indicator of risk. Just like the 1990s, a stable home price environment is a very good sign for the housing market and will help anchor the economy if it encounters rough patches in the future.
Volatility is defined as the six-month standard deviation in the year-over-year changes in national monthly home prices.
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