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Two Items Missing in Coverage of the June Case-Shiller Data
The coverage of the release of the June Case-Shiller housing prices indices overlooked two important items in the data. First, an examination of the tiered indices (these show separately the movement of house prices in each city for cheapest third of houses, the middle third, and upper third) indicates a sharp divergence within many markets. In several of the former bubble markets higher end home prices appear to be stabilizing, while prices for homes in the bottom tier continue to fall rapidly.
For example, in Los Angeles prices in the bottom third of the market fell by 3.2 percent in June, while prices in the top third fell by just 0.2 percent. Over the last quarter, prices for homes in the bottom tier fell at a 12.2 percent annual rate, while prices in the top tier dropped at just a 0.8 percent rate.
There’s a similar story in Miami, where prices in the bottom tier fell at a 14.5 percent annual rate over the last quarter, while prices in the top tier fell at just a 4.2 percent rate. Over the last year, prices in the bottom tier have fallen 31.6 percent, which is not much larger than the 25.3 percent decline in prices for houses in the top tier. There’s a similar story in Las Vegas, Phoenix, San Diego, and San Francisco.
Ultimately, there must be some spillover in the sense that if the cheapest homes fall far enough, people looking to buy more high-end homes might instead opt for a cheaper one and then invest in major renovations. But the divergence that is showing up in the data at present is striking.
The other important point to note in connection with house prices is that inflation has picked up so that house prices would be falling rapidly in real terms, even if nominal house prices were flat. Over the last quarter, the CPI, excluding the rental components, increased at 14.1 percent annual rate. The bubble can be deflated either by a fall in nominal house prices or through inflation. There are important distributional implications for which route the collapse follows (borrowers will be helped by inflation, while lenders will be hurt), but either route can restore house prices to their long-term trend level.
--Dean Baker
COMMENTS (10)
Dean,
About 6 to 8 weeks ago I heard the interview of a real estate "expert" on the topic of home sales data. One of his major points was that the sales data do not distinguish traditional sales (willing buyer, willing seller and neither compelled) from distress sales (foreclosed properties be unloaded, "cash short" sales and other sales that are the product of economic distress). The expert claimed to have researched the data for his area and for a limited period of time and concluded that sales prices were down slightly in traditional sales (something 1% to 3% as I recall) while distress sale prices were down subtantially (about 15% as I recall).
Does the Case-Schiller distinguish traditional sales from distress sales?
It seemly probable to me that upper bracket homeowners selling upper bracket homes are less likely to be making distress sales than lower income homeowner selling lower priced homes.
Posted by: Anonymous | August 27, 2008 1:34 PM
Prices still need to fall in line with median incomes.
Posted by: . | August 27, 2008 1:57 PM
And remember, the inflation route would hurt future borrowers and help future lenders- because there would be an inflation penalty built into rates for the next 10 years like in the 80s. The market would no longer assume 2% inflation, instead it would assume 4% inflation, even if inflation fell back to 2%. Penalizing the borrowers for a few years until low inflation credibility was reestablished.
Posted by: Steven | August 27, 2008 4:31 PM
Dean,
I would venture to say that the losses suffered by Fannie, Freddie and FHA are directly linked to the bottom one-third of the housing segment. So many of those borrowers have simply walked away because they had very little of their stake at the home. Who wouldn't walk?
You have complained in the past about using one-quarter of CPI to extrapolate into an annual rate. You said one quarter is often erratic. Perhaps I have a bad memory here.
Posted by: James | August 27, 2008 4:45 PM
James,
yes, the last quarter CPI was unusually high. I was just using it to make a point. Inflation has clearly accelerated and that will be lowering real house prices even if the nominal decline slows.
Posted by: Dean Baker | August 27, 2008 5:24 PM
I wonder whether price reductions at the bottom of the housing food chain will propagate up over time.
Posted by: Tortoise | August 27, 2008 11:43 PM
Prices for the upper third have falled less this time but what happened to them earlier in the crash. Usually, during a slump, high end homes drop first. If that happened this time it might explain the difference.
Posted by: Erik L | August 28, 2008 7:30 AM
Owners of high end homes have more staying power, waiting for their price. People who need to get out of cheaper houses, especially if there's a distress-based over-supply, have no such bargaining leverage.
Posted by: Tom C | August 28, 2008 11:25 AM
The disconnect was pretty easy to predict - manias usually drive up the cheapest stuff the most, with the collapse making them fall the farthest.
I recommend Tulipmania as a great book that talks about just this phenomenon, in relation to the Tulip bubble.
As for inflation reestablishing the trendline, won't that also require wage inflation as well?
Posted by: Jim D | August 28, 2008 6:56 PM
Thanks for pointing this out. Once again, you have provided interesting incremental information rarely seen elsewhere.
Any ideas on the reason for the disparate price declines? Sounds like it could be due to decreased immigration plus an increase in low-skilled immigrants voluntarily returning to their home countries.
Posted by: Terry | August 31, 2008 12:56 PM