The latest Case-Shiller Home Indices came out yesterday and there were few surprises. Price appreciation declined in almost every market, a fact that suggests that home values are stabilizing. This should come as no surprise since for most markets the first half of 2013 was when the greatest appreciation occurred. This has been especially true in Southern California. It is a natural occurrence that as we get closer to the tail end of the previous cycle’s boom, that the year over year comparison of home values should draw closer. Assuming prices have been relatively flat since July of 2013, we should find that the year over year appreciation number would become zero or close to it anyway. If for example we’ve gone up 2% since last July, we should be 2% higher when we compare this July to last. It’s totally logical. If prices were to continue to show a spread in the coming months, this would indicate that appreciation may not have stopped in July, rather that it continues to rise only at a slower pace. At some point either the % of change will be zero or may even go into the negative, that is unless we continue to appreciate some measurable amount each month over the last indefinitely. I suspect it should near zero as we get into the fall. Of course even within Case-Shiller there are 20 markets that the numbers are based on and some markets may continue to appreciate. Every market is local and appreciates or declines at its own pace.
In reading the report, a couple things stood out to me. First was that San Francisco is about the hottest market in the country. Not a surprise given that the Bay Area is home to the nation’s largest economic engines of tech and biotech. The other interesting cities were Denver and Dallas. If we are to believe the media reports, Texas’ economy is growing exponentially as more and more companies are lured there because of a belief that it is a better climate for business and offers a lower cost of living. It will be interesting to watch the effect on Dallas of its appreciating housing market. Denver is interesting because the only economic windfall I am aware of there, is their legalization of marijuana. It begs the question, is dope fueling the housing industry in Denver?
Another interesting point to come out was the dearth of single family home building. Virtually all the construction gains were said to be in multifamily apartments. And while this is clearly needed, it is not the engine for economic growth that single family home construction is. What we know is this: home builder stocks prices have been on a torrid pace since the housing began its rebound. We also know that in areas like California, there is a shortage of land and nationwide a shortage of build-ready lots. There is also a shortage of skilled labor to build single family homes since so many workers had to learn new skills for new careers when home building came to a standstill during the Great Recession. In addition there’s the pent up demand factor. With new homes in short supply after years of anemic home building volume and with the decline in investor flips due to the decline in distressed property availability, newer or updated properties are selling at a premium. This premium should push home builders to build. But if there’s no ready land and not enough workers, that’s just not going to happen. Fed Chairwoman Yellen recently expressed concern over the slowing of the housing market. Talk about a tiger chasing its tail.
Housing is slowing because prices and interest rates have risen while incomes have not. With housing slowing, builders are being more cautious and measured in the number of units they are building. New home availability is a catalyst to move and a monster job creator. The absence of new homes leaves would be buyers only access to older used homes to move to. Thus many would be buyers remian on the sidelines since there is a shortage of newer and improved or updated properties available. This in turn leads to a continued slowing in housing, which then logically leads home builders to use greater restraint when building, creating fewer jobs, repressing income growth which leads to… a slower housing market and a floundering economy. Thus it would appear that our current economic lethargy may continue and this could lead to pressure on home values. What could change this course? More jobs, better jobs, maybe changes in tax policy or maybe a slight give back of some of the housing value gains we experienced last year. Maybe a little decline will be just enough to get buyers off the fence and back to buying, providing a spur for the next wave of home price appreciation. Alas, only time will tell.