House Price Comments, Real House Prices, Price-to-Rent Ratio
Case-Shiller reported the second consecutive year-over-year (YoY) gain in their house price indexes since 2010 – and the increase back in 2010 was related to the housing tax credit. Excluding the tax credit, the previous YoY increase was back in 2006. The YoY increase in July suggests that house prices probably bottomed earlier this year (the YoY change lags the turning point for prices).
On a Not Seasonally Adjusted (NSA) basis, the Case-Shiller 10-City composite is up 7.4% from the post-bubble low earlier this year, and the 20-City is up 7.8% from the post-bubble low. That is a significant increase, and even when NSA prices start to decline month-over-month in the September or October reports, I expect that house prices will remain above the recent low.
On a seasonally adjusted (SA) basis, prices are up 3.7% and 4.0% from the March lows for the 10-city and 20-city composite indexes.
However, no one should expect the strong price increases to continue. The Case-Shiller Composite 20 index NSA was up 1.6% from June to July. However a large portion of that increase was seasonal. On a Seasonally Adjusted (SA) basis, the Composite 20 index was up 0.4%. That is a 5% annualized rate – and that will probably not continue. I suspect much of the increase over the last few months was a "bounce off the bottom" and prices increases over the next year or two will probably be more gradual.
Here is another update to a few graphs: Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1999 to 2000 levels depending on the index.
Nominal House Prices
The first graph shows the quarterly Case-Shiller National Index SA (through Q2 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through July) in nominal terms as reported.
In nominal terms, the Case-Shiller National index (SA) is back to Q1 2003 levels (and also back up to Q4 2010), and the Case-Shiller Composite 20 Index (SA) is back to July 2003 levels, and the CoreLogic index (NSA) is back to December 2003.
Real House Prices
The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.
In real terms, the National index is back to mid-1999 levels, the Composite 20 index is back to July 2000, and the CoreLogic index back to February 2001.
In real terms, most of the appreciation early in the last decade is gone.
In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.
Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.
This graph shows the price to rent ratio (January 1998 = 1.0).
On a price-to-rent basis, the Case-Shiller National index is back to Q3 1999 levels, the Composite 20 index is back to June 2000 levels, and the CoreLogic index is back to February 2001.
In real terms – and as a price-to-rent ratio – prices are mostly back to late 1990s or early 2000 levels.