Yesterday’s Case-Shiller 20 city home price index and the FHFA purchase-only home price index showed an economy that has generally recovered, at least when it comes to the housing market.
According to the Case-Shiller 20 city home price index, home prices were up 13% compared to March 2012, while based upon the FHFA purchase-only home price index, home prices were up about 7%.
The difference in the two indices’ price measures is irrelevant at this point. What matters is the trend.
Trends in the housing market
When looking at the year over year growth, the trend for both appears to be peaking, which would mean slower home price appreciation in the coming months.
Interestingly, the potential of decelerating home prices doesn’t corroborate the existing/new home sales figures.
Yesterday’s new home sales number came in at 440K, about 5K below what the market expected and, based upon the past relationship with existing home sales, about 400K below where new home sales should be (at least).
The following graphic shows the argument. The blue line represents the historical trend between the two. As a general rule, the two are usually closely related, with a tight fit along the linear trend line. The relationship has not held this time around, at least not since the onset of the housing market recovery in the summer of 2010. Instead, we’ve seen existing home sales recover much quicker than new home sales, as evidenced by the circled blue months, which are almost exclusively new/existing home sales numbers since 2010.
How do the home sales/home prices figures not corroborate the state of the housing market?
Essentially, if new homes are going to catch up to where they should be – meaning a shift to the right from the blue circle – home prices would likely continue to accelerate. However, instead of accelerating, home prices appear to be peaking, with slower home price growth in the coming months.
How will this play out?
There are really only two possible scenarios.
First, either home prices are not peaking (on a Y/Y growth basis), and the current slowdown is just a prelude to further acceleration coming soon. In this case, new homes sales may pick up quickly, pushing the blue circle the right, where it should be.
The second possible scenario is that there’s been a permanent structural shift in the housing market, where new home sales will forever make up a smaller portion of the total. The driver behind this scenario might be a younger demographic that struggles to make enough money to buy a single-family home or simply lacks the desire to own a home. In the scenario, the blue circle stays where it is and home prices slowly depreciate to their long-term trend.
Which scenario is likely to be more accurate?
Unless fundamentals change, it may unfortunately be the latter.