House Prices Bottomed in April

Another last Tuesday, another positive report on the S&P Case-Shiller Home Price Index. The 20-city composite was up 1.2% in August, putting it 4.85% above its April low. That’s a long long way from the heights of 2006 (it’s now 29% Two-story_single-family_home below the July 2006 peak) but it’s increasingly looking like this is not just a blip in the data.

17 of the 20 cities recorded gains. Charlotte, Cleveland, and Las Vegas were the only unfortunates. Charlotte and Cleveland don’t have much to worry about, they were both up more in July than they were down in August, and overall they saw relatively modest declines in the bust.

Vegas, on the other hand, can’t seem to snap its losing streak. This makes three solid years of down months. The only consolation seems to be that Sin City was down only 0.3% in August, breaking up two years of monthly losses greater than 1%. It’s now down 55% from the peak. Yikes.

With the Vegas-excepted upswing now in its fourth month, the question is no longer have we found a bottom in house prices but is this bottom the real, long term, thing or just a temporary respite.

Bloomberg has a nice article today summarizing the bull and bear cases for housing. The bull case is relatively obvious, that the storm is over, prices are compellingly low, and potential buyers no longer think waiting for a better price is a good idea.

The bear case is that this is a false bottom created by government policy, particularly the first time home buyer credit. The credit expires in a month, implying that this party will come to an abrupt end soon.

Of course, the $8,000 home buyer credit is as popular as you would expect a government giveaway of cash to be, enthusiastically embraced by those who get the subsidy. But it is not clear how much it is affecting the price of houses. To make a dent in that it would have to induce people who would otherwise not buy a house to do so and/or get them to pay more for it.

If the credit were driving the run up in house prices you would see a skew to the lower end of  the market. In as much as $8K changes behavior around a $200K property, it ought to have less effect on a $500K one. And yet the data does not show this. S&P publishes "tiered" price indexes, that is, indexes broken down into high, middle, and low priced houses, for 16 of the 20 cities in the composite. And in 9 of those 16, high priced houses have outperformed low priced ones.

I am a bull here. I think this spring really was the bottom. The rate of increase we have seen over the past four months (it annualizes at 15.26%) is clearly not sustainable, but this isn’t a false dawn. The dead cat bounce may not be over, the correction from overshooting downwards in the Great Panic phase of the Great Recession may run for another month or two, but I expect that soon we will see prices settle down to growing by inflation only.

Which is to say that in nominal terms the house prices we saw in April were as low as we are likely to ever see again. The same is true for stocks, come to think of it.


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