This chart shows three measures of real—that is, inflation-adjusted—housing
prices through the first quarter of 2013.
Reports Tuesday that housing prices rose more than they have since 2006 have spurred some optimism and a rise in the Dow Jones. But the news
could use some tempering:
Standard & Poor’s Case Schiller index. Analysts were looking for a rise of 1 percent. It was the biggest annual gain in nearly seven years, and a further sign that the strengthening housing recovery is providing a source of support for the economy.
Prices in the 20 cities jumped 10.9 percent year over year, beating expectations for 10.2 percent. It was the biggest increase since April 2006, just before prices peaked in the summer of that year.
Given the beating the housing market has taken and the vast number of owners who have not been able or willing to sell their homes because prices have been so low (often less than the balance of their mortgage), this report for the first quarter is good news. For one thing, it could mean that more of the houses sold going forward will be bought by individuals instead of investors who have benefited from foreclosures and the economic downturn that drove prices south.
First caveat: The Case Shiller Index is based on nominal prices. As Bill McBride at Calculated Risk eternally points out, a truer measure of what's happening can be found in inflation-adjusted (real) prices and the "price-to-rent" ratio that compares buying with leasing. For instance, a house priced at $175,000 in 2000 would be $236,000 now based solely on inflation over those 13 years.
In real terms and price-to-rent, nationally, housing prices and the price-to-rent ratio are back to where they were in the early '00s. See additional caveats below the fold:
Second caveat: Housing price ups and downs are regional. Some states and urban areas, like Phoenix, took big hits when the housing bubble burst and have since had big rebounds. Some, like Detroit, took big hits and have not recovered to the pre-2000 levels. Other areas saw relative small shifts down and are seeing similar shifts up now.
Third caveat: Inventory is still very low, and that, along with pent-up demand of Americans who can afford to buy, has boosted prices. As prices rise, home-owners who were previously reluctant to enter the market will put their houses up for sale, and the increased inventory will slow down the fairly rapid price rise of the past year.
Fourth caveat: The lame $25 billion National Mortgage Settlement that let the banking industry pay peanuts for its criminal behavior in falsifying documents and misleading consumers is still letting the banks screw people. (The industry admitted to wrongdoing.) David Dayen, who has followed the settlement deal from before its inception, wrote at the beginning of May:
[N]ew evidence reveals the nation’s largest banks have apparently continued to fabricate documents, rip off customers and illegally kick people out of their homes, even after inking a series of settlements over the same abuses. And the worst part of it all is that the main settlement over foreclosure fraud was so weakly written that it actually allows such criminal conduct to occur, at least up to a certain threshold. Potentially hundreds of thousands of homes could be effectively stolen by the big banks without any sanctions.
The
evidence is quite damning. The impact of this activity on housing prices could be two-fold: more foreclosed houses on the market driving all prices down and a lack of trust of banks among consumers who would otherwise be in the market for a house.