Written by Steven Hansen
The non-seasonally adjusted Case-Shiller home price index (20 cities) for April 2012 (released today) showed the first month-over-month housing gain in seven months.
- Home prices increased 1.3% month-over-month
- However, home prices declined year-over-year 1.9% (versus -2.6% in March).
- The market had expected a year-over-year decline of 2.5% (versus the 1.9% reported)
Case-Shiller home price index was the only index showing a significant year-over-year home price decline. The National Association of Realtors and CoreLogic have reported year-over-year home price gains. LPS has reported an insignificant 0.1% decline year-over-year. Note the caveats section at the end of this post.
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 National Association of Realtors normally shows exaggerated movements which likely is due to inclusion of higher value homes.
The way to understand the dynamics of home prices is to watch the direction of the rate of change – and not necessarily whether the prices are getting better or worse. Here almost universally – home prices are either improving or becoming less bad – with the National Association of Realtors home prices currently showing the largest price gains.
There is significant differences between the indices on the rate of “recovery” of home prices. The real question is whether this is a seasonal effect, or is the home price decline ending.
A synopsis of Authors of the Leading Indices:
Case Shiller’s David M. Blitzer, Chairman of the Index Committee at S&P Indices, sees broad gains.
“With April 2012 data, we finally saw some rising home prices. On a monthly basis, 19 of the 20 MSAs and both Composites rose in April over March. Detroit was the only city that saw prices fall, down 3.6%. In addition, 18 of the 20 MSAs and both Composites saw better annual rates of return. It has been a long time since we enjoyed such broadbased gains. While one month does not make a trend, particularly during seasonally strong buying months, the combination of rising positive monthly index levels and improving annual returns is a good sign. The 10-City and 20-City Composites each rose by 1.3% for the month and posted annual rates of return of -2.2% and -1.9% compared to April 2011, better than the -2.9% and -2.6% annual rates seen in March 2012.
“We were hoping to see some improvement in April. First, changes in home prices are very seasonal, with the spring and early summer being the most active buying months. Second, while not as strong and we believe less reliable, the seasonally adjusted data were also largely positive, a possible sign that the increase in prices may be due to more than just the expected surge in spring sales. Additionally, the last few months have seen increased sales and housing starts amidst a lot of talk of better housing markets, so some price gains were anticipated.
“Detroit and New York stand out this month as the only two MSAs that saw their annual rates of return deteriorate compared to March. While Detroit posted a positive annual rate of 1.2%, it was still well below March’s +3.9%; New York was -3.8% in April down from -3.0% in March. Detroit was also the only city to show a monthly decline, down 3.6%. All other MSAs improved versus March.
“Atlanta and Phoenix, two markets we have followed closely in 2012 for their contrasting trends, have continued along their opposite paths. Atlanta continues to be the only city with double-digit negative annual returns, -17.0%, whereas Phoenix fared the best in terms of annual returns at +8.6% in April.”
CoreLogic’s Anand Nallathambi, president and chief executive officer commenting on its April data, suggests home prices are stabilizing:
“We see the consistent month-over-month increases within our HPI and Pending HPI as one sign that the housing market is stabilizing. Home prices are responding to a restricted supply that will likely exist for some time to come—an optimistic sign for the future of our industry.”
“Excluding distressed sales, home prices in March and April are improving at a rate not seen since late 2006 and appreciating at a faster rate than during the tax-credit boomlet in 2010,” said Mark Fleming, chief economist for CoreLogic. “Nationally, the supply of homes in current inventory is down to 6.5 months, a level not seen in more than five years, in part driven by the ‘locked in’ position of so many homeowners in negative equity.”
Lawrence Yun, NAR chief economist commenting on May 2012 data said the market is constrained by not having enough houses to sell:
Inventory shortages in certain areas have been building all year. The slight pullback in monthly home sales is more likely due to supply constraints rather than softening demand. The normal seasonal upturn in inventory did not occur this spring,” he said. “Even with the monthly decline, home sales have moved markedly higher with 11 consecutive months of gains over the same month a year earlier.
There are broad-based shortages of inventory in the lower price ranges in much of the country except the Northeast, and in the West supply is extremely tight in all price ranges except for the upper end. Realtors® in Western states have been calling for an expedited process to get additional foreclosed properties onto the market because they have more buyers than available property. Widespread inventory shortages also are found in much of Florida.
Lender Processing Services (LPS) April 2012 home price index rose 1.1% month-over-month, but still remains down 0.1% year-over-year.
Caveats on the Use of Home Price Indices
The housing price decline seen since 2005 varies by zip code. 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 have declined almost 60%.
Each home price index uses a different methodology – and this creates slightly different answers. There is some evidence in various home price indices that home prices are beginning to stabilize – the evidence is also in this post. Please see the post Economic Headwinds from Real Estate Moderate.
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)
Recent review of the Fed 2011 stress tests for banks has a new recession scenario that would see home prices decline another 20% from here. It is unlikely that the attempts to complete a bottom here could hold under those conditions.
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