Monday, December 04, 2006

House Price Changes in the US

The Office of Federal Housing Enterprise Oversight (OFHEO) released its quarterly estimates of house price trends in the US last Thursday. I realize that this is a little late (circumstances have been consipiring against my blogging of late), but I'm hoping that this is indeed an instance of Better Late Than Never.

From the report's news release (pdf file):
U.S. home prices rose in the third quarter of this year, but the rate of increase continued to slow and some areas experienced actual price declines. Nationally, home prices were 7.73 percent higher in the third quarter of 2006 than they were one year earlier. Appreciation for the most recent quarter was 0.86 percent, or an annualized rate of 3.45 percent. This reflects a further slowdown from that reported for the second quarter when the quarterly appreciation rate was 1.3 percent and the annualized rate was 5.1 percent. The quarterly increase is the lowest since the second quarter of 1998.
Instead of focusing on the national average, however, I much prefer looking at the house price data city-by-city; real estate markets are quintessentially local, and the national average obscures most of the interesting bits of information about the US housing market.

The following picture shows the 12-month price change in houses in several coastal cities that enjoyed a significant house price boom during the period 2000-05.

The slowdown in the market for houses is striking in this picture. What is worrying about it to me, however, is that the downturn in house price appreciation has not yet shown any signs of leveling off. In other words, it looks very possible that one or more of these series will move into negative territory within the next couple of quarters, which would indicate y-o-y price declines. How negative, and for how long, is of course the big question. But until we start to see some leveling off in house price trends, I will remain nervous that the housing market slowdown still has quite some way to go.

On the other hand, many interior cities in the US either missed out on the big appreciation of 2000-05, or else jumped on the bandwagon late. The following picture shows some examples:

Putting these two pictures together, an interesting story emerges - one that is hidden by the national averages described above: house price appreciation continues at a moderate pace in many US cities, and is actually still very high in those places (such as the mountain West) that joined the house price boom a little late. But in those cities that enjoyed the biggest appreciations earlier in the decade, the slowdown in the housing market looks abrupt, increasingly severe, and far from over.

My concern is that it is precisely those rapidly cooling coastal regions of the US that contain most of the people who have been counting on rising house prices to sustain their level of consumption, as well to sustain the solvency of their balance sheets. Only when prices stop rising in those areas - or even start falling - will we really see the full impact of the slowing housing market on the rest of the economy.

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