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Overview: This week's economic releases—relook at the consumer

Part 7
Overview: This week's economic releases—relook at the consumer (Part 7 of 11)

Why home prices should be moderated—Home Price Index

S&P/Case-Shiller Home Price Index for April

The S&P/Case-Shiller Home Price Index (or HPI) for April will be released on Tuesday, June 24. The index tracks 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 had 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.

Part 7Enlarge Graph

Key takeaways from the last release

The 20-city index reading for March, implied an average month-on-month (or MoM) price increase of 0.9% in the 20 metros tracked by the index. Home price increases were reported in all cities with the exception of New York. This was way ahead of market estimates of 0.2%, as home price increases continued their upwards momentum. The HPI increased 12.4% on a year-over-year (or YoY) basis. San Francisco reported the largest gains in home prices, both on a monthly and annual basis. However, March’s report also mentioned that home price increases in 13 cities appeared to be moderating.

Another index reading, the S&P/Case-Shiller U.S. National Home Price Index, which includes all nine census divisions in the U.S., increased by 10.3% in the 1Q14, compared to 1Q13.

Outlook

The increase in home prices has been attributed to lack of new home supply, especially single family, starter homes. Most of the supply of new homes appears to be coming in the apartments segment, leading to low inventories and short supply of single-family homes. Most housing indicator reports cite supply issues and poor first quarter weather for the housing market woes in 2014.

Homebuilders like those in the iShares U.S. Home Construction ETF (ITB) and the State Street SPDR Homebuilders ETF (XHB) are likely to benefit from the short supply, if they respond to the demand and bring new homes into the market. Lennar (LEN) and PulteGroup (PHM) feature in the top ten holdings of both ETFs.

Robert Shiller, co-founder of the index, in an interview given to CNBC a few months back, attributed these home price increases to investor demand rather than demand from families looking to buy a home. This June, the S&P 500 Index (SPY) has scaled record after record. A booming stock market (SPY) is likely to shift some of these investors into stocks, which may result in moderating home prices in the future.

To read about another indicator measuring home price increases, which will also be released on Tuesday, June 26, continue reading the next section of this series.

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