uploads///Case Schiller

The Case-Shiller Index Is 10% below Its 2006 Peak


Jun. 29 2016, Updated 6:19 a.m. ET

Real estate professionals watch the Case-Shiller Index

The Case-Shiller Index is the most widely quoted index of real estate values. You could consider it the Dow Jones Industrial Average of home price indices.

Keep in mind as well that real estate values are big drivers of consumer confidence and spending. So, they have an enormous impact on the economy.

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Home prices continue to climb

In April, the seasonally adjusted Case-Shiller Index rose by 1% month-over-month. It’s up by 5.4% year-over-year. Seven cities—Denver, Dallas, Portland, San Francisco, Seattle, Charlotte, and Boston—recouped all of their losses from the Great Recession and are setting new highs. Three cities—San Diego, San Francisco, and Cleveland—reported monthly declines. Overall, prices are still about 10% below the peak set in the summer of 2006.

House prices rose faster than incomes

Since home prices bottomed out, we’ve had a couple of years of low double-digit returns in prices. Historically, incomes and house prices have correlated very closely. Once the real estate bubble started inflating in 2000, house prices broke out of their historical range of 3.2x–3.6x incomes. They peaked at 4.8x, fell to about 3x at the bottom, and rebounded to 4.2x. This means that home price appreciation will have to be driven more by wage growth going forward.

Home prices aren’t extremely important to agency REITs like Annaly Capital Management (NLY) and American Capital Agency Corporation (AGNC) because these funds invest in mortgage-backed securities that are guaranteed by the federal government.

However, home prices are extremely important to non-agency REITs like Newcastle Investment Corporation (NCT) and Redwood Trust (RWT). Investors interested in trading the mortgage REIT sector through an ETF should look at the iShares Mortgage Real Estate ETF (REM).


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