Prices Show Sharp Divergence in Latest Case-Shiller Data


By Dean Baker

September 30, 2009

House prices in several cities are rising at a bubble pace.

The seasonally adjusted Case-Shiller 20-City index rose in July for the second consecutive month, by 1.2 percent. Over the last three months, the index has increased at an 8.0 percent annual rate. This is an extraordinary reversal from earlier this year when prices were falling at more than a 20 percent annual rate.

This extraordinary turnaround is associated with very different patterns in house prices both across and within metropolitan areas. Some markets are now showing rates of price appreciation that are close to their bubble pace. Prices in San Francisco have risen at a 29.8 percent annual rate over the last three months, while prices in Washington rose at a 16.5 percent rate. In Chicago, they rose at a 14.1 percent rate and in Boston at a 12.6 percent rate. In Dallas, which never had much of a bubble, prices rose at a 16.2 percent rate and in Minneapolis at a 25.0 percent rate.

On the other side, prices in Detroit continued their fall, dropping at a 7.8 percent annual rate. The bubbles continued to deflate in both Seattle and Las Vegas, falling at 5.5 percent and 25.2 percent annual rates, respectively.

A large divergence also shows up between market tiers in the same metropolitan area. For example, in Washington, D.C., prices of homes in the middle tier rose at a 13.8 percent rate over the last three months, while prices of homes in the bottom tier fell 5.1 percent. In San Francisco, prices for homes in the top tier rose at a 25.5 percent annual rate over the last three months, while prices for homes in the bottom tier rose at a 0.7 percent rate. Boston showed the opposite pattern with the price of homes in the bottom tier rising at a 38.0 percent annual rate over the last three months, while the price of homes in the top tier fell at a 0.3 percent rate. In New York City, house prices rose at a 5.4 percent annual rate, while condo prices fell at an 11.4 percent rate.

This pattern of price movements is quite different from the run-up prior to 2006. While not all markets or market tiers moved at the same rate, house prices did generally move in the same direction both across and within markets.

Other recent housing data are also sending mixed signals. There was a modest drop in existing home sales reported for August after four consecutive monthly increases. The mortgage applications index has been trending downward the last five weeks. While new home sales have been trending upward since March, there was a sharp drop in prices in August. The median sales price of a new home fell by 9.5 percent, with the average price dropping 6.0 percent. The monthly price data are erratic, but even if the true price decline was just half of these numbers, it would suggest a striking one-month change. It is worth noting that the new home prices refer to contracts written in August, as opposed to the other series that are based on sales data, and therefore prices in contracts written 4-8 weeks earlier.

It is likely that some of the erratic movements in the housing market are the result of the first-time buyers tax credit. Most research indicates that it has had a substantial impact on the housing market. With the credit scheduled to expire at the end of November, those hoping to benefit from it would have moved forward their plans. At this point, its impact is likely waning, as it would be necessary to have a contract signed very soon in order to be assured that the closing will take place before the current deadline. As noted before, even if Congress extends the deadline it is unlikely to have a large effect since so many purchases have already been pulled forward. With the boost from the first-time buyers credit fading and the economy experiencing rising unemployment, the demand side of the market will be weakening. At the same time, foreclosures are continuing at a rapid pace, ensuring a large supply. This should mean further price declines.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.