From a small northwestern observatory…

There are two important house price indices in the U.S. — the Federal Housing Finance Authority index (which can be localized down to the SMSA level) and the S&P Case Shiller Index.  The latter actually pre-dates the former, and was the source of data for co-founder Robert Shiller (yes, the Nobel Laureate) making his “housing bubble” cries in the wilderness a half-decade ago.  If for no other reason, we pay homage to this report, which hit our desks this morning.  Additionally, the FHFA index and the C-S index measure house prices somewhat differently, so at a localized level the two indices may say somewhat different things.  Here at Greenfield, we often have to cobble together an index for a market that is smaller than an SMSA.  Using these two indices in tandem, a researcher is able to discern more subtle issues in a local market.  Hence, keeping up with house prices really requires both rather than one or the other.

Bottom line?  For the most recent analysis period (October-November, 2011), both their 10-city and 20-city composites showed price declines of 1.3%, and for the second consecutive month, 19 of the 20 cities tracked showed declines.  Further, the 10-city and 20-city indices showed annual returns of negative 3.6% and negative 3.7% respectively.  Worst city?  Atlanta, with a negative 11.8% annual return.  The only two cities with positive annual returns were Detroit (+3.8%) and Washington, DC (+0.5%).

Our own research here at Greenfield suggests that the current “bottom fishing” on house prices will probably sustain until there is some equilibrium in the home ownership rates.  One might argue that the stagnation in house prices is indelibly linked to over-supply (the “shadow” inventory in the U.S. equals about a year and a half of sales) and the lack of demand (which is tied to the unemployment rate).  Nonetheless, thirty years ago, when interest rates were double what they are today, and the unemployment rate in the U.S. was about the same, home prices were strong and stable.

Why is today different?  Three things — first, the home price bubble was caused by the home ownership rate bubble.  Until home ownership rates get back to a sustainable level, home prices won’t start behaving.  (What is behaving, you might ask?  Historically, before the bubble, home prices track very nicely against household income, which means they’re a great inflation hedge.)  Second, the recent collapse in home prices has taken the bloom off the rose, so to speak, as American households have lost faith in the “home” as a store-house of value.  Finally, the low-down-payment loan was one of the most notable victims of the housing collapse (unfairly, we might add).  As such, “starter” home sales are moribund (just look at new home sales for the clue to this one) and if “starter” homes can’t be sold, then “move up” homes can’t be bought.

I hate to be the bearer of bad tidings on a cold, winter day.  (Irony — the northwestern U.S., where I live, is the ONLY part of the country not facing unseasonably warm weather this winter.)  Unfortunately, housing is just going to limp along for a while.