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Tuesday, August 28, 2012

House Price Comments, Real House Prices, Price-to-Rent Ratio

by Calculated Risk on 8/28/2012 11:56:00 AM

Case-Shiller reported the first year-over-year (YoY) gain in their house price indexes since 2010 - and the increase back in 2010 was related to the housing tax credit. Excluding the tax credit, this is the first YoY increase since 2006. The YoY increase in June suggests that house prices probably bottomed earlier this year (the YoY change lags the turning point for prices).

Since there is a seasonal pattern for house prices, we should expect the month-over-month change to turn negative later this year (probably in the report for August or September). The key will be to watch the YoY change and also compare to the seasonal lows in March 2012. In June, the Case-Shiller Composite 20 index Not Seasonally Adjusted (NSA) was 6.0% above the March 2012 low.

No one should expect the strong price increases to continue. The Case-Shiller Composite 20 index NSA was up 2.3% in June from May. However a large portion of that increase was seasonal. On a Seasonally Adjusted (SA) basis, the Composite 20 index was up 0.9%. That is a 11% annualized rate - and that will not continue. I suspect much of the increase over the last few months was a "bounce off the bottom" and I don't expect prices to increase at this pace.

Here is another update to a few graphs: Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1999 to 2000 levels depending on the index.

Nominal House Prices

Nominal House PricesClick on graph for larger image.

The first graph shows the quarterly Case-Shiller National Index SA (through Q2 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through June) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to Q1 2003 levels (and also back up to Q4 2010), and the Case-Shiller Composite 20 Index (SA) is back to July 2003 levels, and the CoreLogic index (NSA) is back to November 2003.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to mid-1999 levels, the Composite 20 index is back to June 2000, and the CoreLogic index back to October 2000.

As we've discussed before, in real terms, all of the appreciation early in the last decade is still gone.


In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q3 1999 levels, the Composite 20 index is back to June 2000 levels, and the CoreLogic index is back to August 2000.

In real terms - and as a price-to-rent ratio - prices are mostly back to late 1990s or early 2000 levels.

All Current House Price Graphs