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posted on 28 February 2017

Case-Shiller 20 City Home Price Index December 2016 Shows 5.6 % Year-over-Year Growth

Written by Steven Hansen

The non-seasonally adjusted Case-Shiller home price index (20 cities) year-over-year rate of home price growth improved to 5.6 %. The index authors stated "One factor behind rising home prices is low inventory".

Analyst Opinion of Case-Shiller HPI

Many pundits believe home prices are back in a bubble. Maybe, but the falling inventory of homes for sale keeps home prices relatively high. I continue to see this a situation of supply and demand. It is the affordability of the homes which is becoming an issue for the lower segments of consumers.

  • 20 city unadjusted home price rate of growth accelerated 0.3 % month-over-month. [Econintersect uses the change in year-over-year growth from month-to-month to calculate the change in rate of growth]
  • Note that Case-Shiller index is an average of the last three months of data.
  • The market expected:
Consensus Range Consensus Actual
20-city, SA - M/M 0.6 % to 0.9 % 0.7 % +0.9 %
20-city, NSA - M/M +0.3 %
20-city, NSA - Yr/Yr 5.3 % to 5.5 % 5.4 % +5.6 %

S&P/Case-Shiller Home Price Indices Year-over-Year Change

Comparing all the home price indices, it needs to be understood each of the indices uses a unique methodology in compiling their index - and no index is perfect.

The way to understand the dynamics of home prices is to watch the direction of the rate of change. Here home price growth generally appears to be stabilize (rate of growth not rising or falling).

There are some differences between the indices on the rate of "recovery" of home prices.

A synopsis of Authors of the Leading Indices:

Case Shiller's David M. Blitzer, Chairman of the Index Committee at S&P Indices:

Home prices continue to advance, with the national average rising faster than at any time in the last two-and-a-half years. With all 20 cities seeing prices rise over the last year, questions about whether this is a normal housing market or if prices could be heading for a fall are natural. In comparing current home price movements to history, it is necessary to adjust for inflation. Consumer prices are higher today than 20 or 30 years ago, while the inflation rate is lower. Looking at real or inflationadjusted home prices based on the S&P CoreLogic Case-Shiller National Index and the Consumer Price Index, the annual increase in home prices is currently 3.8%. Since 1975, the average pace is 1.3%; about two-thirds of the time, the rate is between -4% and +7%. Home prices are rising, but the speed is not alarming.

One factor behind rising home prices is low inventory. While sales of existing single family homes passed five million units at annual rates in January, the highest since 2007, the inventory of homes for sales remains quite low with a 3.6 month supply. New home sales at 555,000 in 2016 are up from recent years but remain below the average pace of 700,000 per year since 1990. Another factor supporting rising home prices is mortgage rates. A 30-year fixed rate mortgage today is 4.2% compared to the 6.4% average since 1990. Another indicator that home price levels are normal can be seen in the charts of Seattle and Portland OR. In the boom-bust of 2005-2009, prices of low, medium, and high-tier homes moved together, while in other periods, including now, the tiers experienced different patterns.

CoreLogic believes low inventories are spurring rising home prices (December 2016 Data). Per Dr Frank Nothaft, chief economist for CoreLogic and Anand Nallathambi, president and CEO of CoreLogic stated:

As of the end of 2016, the CoreLogic national index was 3.9 percent below the peak reached in April 2006. We expect our national index to rise 4.7 percent during 2017, which would put homes prices at a new nominal peak before the end of this year.

Last year ended with a bang with home prices up over 7 percent nationally, led largely by major metro areas. We expect prices to continue to rise just under 5 percent in 2017 buoyed by lack of supply and continued high demand.

The National Association of Realtors says home sales prices continue to increase (January 2017 data):

Lawrence Yun, NAR chief economist, says January's sales gain signals resilience among consumers even in a rising interest rate environment. Much of the country saw robust sales activity last month as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home. Market challenges remain, but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions.

Competition is likely to heat up even more heading into the spring for house hunters looking for homes in the lower- and mid-market price range. NAR and realtor.com®'s new ongoing research — the Realtors® Affordability Distribution Curve and Score — revealed that the combination of higher rates and prices led to households in over half of all states last month being able to afford less of all active inventory on the market based on their income."

NAR President William E. Brown cautions about another source that could possibly drag down inventory for would-be buyers in coming months. Supply and demand imbalances continue to be burdensome in many markets, and now Fannie Mae is supporting a Wall Street firm's investment in single-family rentals," he said. "This will only further hamper tight supply and put major investors in direct competition with traditional buyers. Instead, the GSEs should lower overly burdensome fees (link is external) and help qualified borrowers become homeowners."

Black Knight Financial Services (formerly known as Lender Processing Services) October 2016 home price index Up 0.1 Percent for the Month; Up 5.7 Percent Year-Over-Year. Note that Black Knight uses the current month closings only (not a three month average like Case-Shiller or a weighted average like CoreLogic), excludes short sales and REOs, and is not seasonally adjusted.

Econintersect publishes knowledgeable views of the housing market.

Caveats on the Use of Home Price Indices

The housing price decline seen since 2005 varies by zip code - and seems to have ended somewhere around the beginning of the 2Q2012. Every area of the country has differing characteristics. Since January 2006, the housing declines in Charlotte and Denver are well less than 10%, while Las Vegas home prices had declined almost 60%.

Each home price index uses a different methodology - and this creates slightly different answers.

The most broadly based index is the US Federal Housing Finance Agency's House Price Index (HPI) - a quarterly broad measure of the movement of single-family house prices. This index is a weighted, repeat-sales index on the same properties in 363 metro centers, compared to the 20 cities Case-Shiller.

The US Federal Housing Finance Agency also has an index (HPIPONM226S) based on 6,000,000 same home sales - a much broader index than Case-Shiller. Also, there is a big difference between home prices and owner's equity (OEHRENWBSHNO) which has been included on the graph below.

Comparing Various Home Price Indices to Owner's Equity (blue line)

With rents increasing and home prices declining - the affordability factor favoring rental vs owning is reversing. Rising rents are shifting the balance.

Price to Rent Ratio - Indexed on January 2000 - Based on Case-Shiller 20 cities index ratio to CPI Rent Index



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