Why S&P/Case-Shiller reports moderating home prices in 13 US cities
S&P/Case-Shiller Home Price Index reports higher prices in March
The S&P/Case-Shiller Home Price Index (or HPI) for March was released on Tuesday, May 27. Home prices in the 20 cities covered by the HPI rose by an average of 0.9% compared to February. Markets had expected an increase of just 0.2%, which indicated that house prices in metropolitan areas were showing no signs of letting up. Out of the 20 cities covered, all save New York City recorded increases in home prices. The S&P/Case-Shiller U.S. National Home Price Index, which includes all nine census divisions in the U.S., rose 10.3% in Q1 2014 compared to the same quarter last year.
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What is the S&P/Case-Shiller Home Price Index?
The S&P/Case-Shiller Home Price Indices are designed to track price trends in typical single-family homes in specific metropolitan areas. The S&P/Case-Shiller Composite of 20 Home Price Index is a value-weighted average of the 20 metro area indices. The index has a base value of 100 in January 2000. An index value of 120 would mean a 20% increase in prices since January 2000 for a typical home located in the subject market. A value of 80 would indicate a 20% price decline since January 2000.
Highlights from the Case-Shiller Home Prices Index report
- San Francisco posted the largest monthly gain at 2.4% in March, while New York was the only city posting a decline in home prices.
- The 20-city HPI rose 12.4% year-over-year, with Dallas and Denver reaching new highs. Home prices in all the 20 cities were higher on an annual basis.
- Annual price gains showed signs of moderating in 13 cities out of the 20, especially in the Sunshine Belt of Las Vegas, Los Angeles, Phoenix, San Francisco, and Tampa.
- Las Vegas and San Francisco recorded the greatest annual appreciation in March, at 21.2% and 20.9%, respectively.
However, price gains appear to be slowing down if we compare annual trends. According to David Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, “The year-over-year changes suggest that prices are rising more slowly… Annual price increases for the two Composites have slowed in the last four months and 13 cities saw annual price changes moderate in March. The National Index also showed decelerating gains in the last quarter.”
Key investor takeaways
Shortages of housing supply and investor demand are key factors spurring home prices. Recent housing starts data releases have indicated that most of the new housing supply consists of multi-family homes (apartment buildings). The Case-Shiller HPI only covers single-family residences. A shortage of the latter type of home can raise prices, benefiting homebuilders like Lennar (LEN) and PulteGroup (PHM). Both LEN and PHM are part of the holdings of the State Street SPDR Homebuilders ETF (XHB), which provides exposure to other homebuilders and home furnishing retailers as well. Both LEN and PHM are also part of the S&P 500 Index (IVV).
According to Blitzer, “Recent comments from the Fed point to bank lending standards as a problem. Other comments include arguments that student loan debt is preventing many potential first time buyers from entering the housing market.”
An environment that enforces higher credit standards may act as a deterrent to home sales in the coming months. However, although mortgage rates have increased by ~55 basis points (May 23, 2013, and May 22, 2014) since this time last year, the interest rate on the 30-year conventional mortgage is down ~39 basis points to 4.14% since the start of 2014 (between January 2 and May 22). This factor may stimulate potential homebuyers to take advantage of the lower rates and may boost housing sales over the next few months. These factors would impact ETFs like the iShares Barclays MBS Fixed-Rate Bond Fund (MBB), which invests primarily in fixed-rate investment-grade mortgage-backed securities.
Fed Chair Janet Yellen’s take on the housing market at the March FOMC meeting
Yellen commented, “There’s a lot of demographic potential there for new household formation that would ultimately generate new construction… And the level of rates I think does matter, and the fact that they’re low now is something that should serve as a stimulus to people coming back into the housing market.” We had mentioned this in an earlier Market Realist series, Why this week’s key releases seem more about expectations, but the comment is relevant in the current context as well.
This may be one of the factors the Fed considered in continuing its taper of monthly asset purchases “at a measured pace.” The Fed has reduced monthly asset purchases by $10 billion per month at each of its last four FOMC meetings. Currently, the Fed is purchasing longer-term Treasury bonds and agency-backed securities at a rate of $45 billion per month.
In the next part of this series, we’ll discuss an alternative measure for home price increases, which were also released on May 27. Please read on.