By Markos N. Kaminis
At last check, S&P Case Shiller’s Home Price Indices reflected year-over-year price increase, but the month-to-month measurement offered a more important guide and told a different story. Case Shiller’s 10-City Index showed 2.6% year-to-year increase in metropolitan home prices, and its 20-City Index reflected 1.7% growth. However, the seemingly solid news clouded over more important trends. For instance, 17 of the 20 metropolitan areas measured produced slower rates of annual growth versus those recorded in July. Worse yet, 15 showed price decline against July. In aggregate, the month-to-month comparisons of the 10-City and 20-City measures showed home prices declining at rates of 0.1% and 0.2%, respectively.
The greater decline in the 20-City Index, and the slower growth in its annual rate of price increase, seem to say the larger MSAs or bigger cities are retaining value better. That is because the largest cities are included in both indices, while the smaller are excluded from the 10-City measure. So if we get variance when removing the smaller cities, as the 10-City Index does, we see what impact the larger and smaller metro areas play in activity.
It’s clear that international demand for big city real estate helps to boost demand for limited preferential locations and helps the average price level as well. Where there is more demand, there will be higher pricing, at least when holding supply constant. In the case of limited territory, you’ll get a squeeze on prices. Also, potential international buyers come from a small pool of affluent and wealthy, where economic trough is not felt as significantly. However, we would expect cost constraints on international corporations and other organizations to limit their expansion into US cities of interest, and thus limit demand from relative international sources.
While the month-to-month change stood out, even the yearly comparison is getting sketchy now, with 12 of 20 towns reporting negative annual rates of home price change. In other words, the real estate market looks to be entering double-dip territory. Prices hit bottom in April of 2009, and so if August prices are not matching up favorably against the prior year period, then we are pretty close to that old watermark.
Home prices are about where they were in late 2003, but the long-term chart seems to say prices are still above natural levels. So, if normalized pricing is somewhere near 2000 levels, which is what the trend line seems to say, then we have a lot lower to go before stabilization. The 20-City composite is down about 28.1% from mid-year 2006 levels, though it’s up 6.7% from the April 2009 trough. Given the current credit and unemployment conditions, prices seem to have no driving factor for lift other than demographics, which are still pretty significant. Still, a thumbnail sketch, based on the trend line at S&P’s report, seems to say prices could theoretically fall as much as another 33% to the normal historic long-term trend line (2000 levels). However, I think it would take a special catalyst to cause such a shock to the illiquid housing market. This just seems to point toward a stale to sad real estate pricing environment for the medium term, on average. I’m looking for prices to move another 10-20% lower, with the possibility of 33% under extreme conditions. That’s a wild number I know, but just look at the charts.