Western Cities Lead Home Price ‘Steady Ascent’

Strong housing price gain in Western metro areas drove a steady increase in the S&P CoreLogic Case-Shiller Home Price Indices (data through November).

The U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 6.2% annual gain in November, up from 6.1% in the previous month. The 10-City Composite annual increase came in at 6.1%, up from 5.9% in October; the 20-City Composite posted a 6.4% year-over-year gain, up from 6.3% the previous month.

Before seasonal adjustment, the National Index posted a month-over-month gain of 0.2% in November. The 10-City and 20-City Composites reported increases of 0.3% and 0.2%, respectively. After seasonal adjustment, the National Index recorded a 0.7% month-over-month increase in November. The 10-City and 20-City Composites posted 0.8% and 0.7% month-over-month increases, respectively. Ten of 20 cities reported increases in November before seasonal adjustment, while all 20 cities reported increases after seasonal adjustment.

“Home prices continue to rise three times faster than the rate of inflation,” said David Blitzer, Managing Director and Chairman of the Index Committee with S&P Dow Jones Indices. “Year-over-year increases have been 5% or more for 16 months; the 20-City index has climbed at this pace for 28 months. Given slow population and income growth since the financial crisis, demand is not the primary factor in rising home prices.”

Blitzer said construction costs recovered after the financial crisis, increasing between 2% and 4% annually, but do not explain all of the home price gains. “From 2010 to the latest month of data, the construction of single family homes slowed, with single family home starts averaging 632,000 annually,” he said. “This is less than the annual rate during the 2007-2009 financial crisis of 698,000, which is far less than the long-term average of slightly more than one million annually from 1959 to 2000 and 1.5 million during the 2001-2006 boom years. Without more supply, home prices may continue to substantially outpace inflation.”

The report said Seattle, Las Vegas and San Francisco reported the highest year-over-year gains among the 20 cities. In November, Seattle led with a 12.7% year-over-year price increase, followed by Las Vegas at 10.6% and San Francisco at 9.1%. Six cities reported greater price increases in the year ending November versus the year ending October.

“Western metros are still seeing the largest gains, but appreciation is accelerating in other areas,” said Mark Vitner, senior economist with Wells Fargo Securities, Charlotte, N.C. “Atlanta and Dallas, markets that have historically been relatively affordable, each posted double-digit annualized gains over the past three months. Strong economic growth has boosted home buying but new construction has been slow to ramp up. Both markets should see strong gains in single-family starts this year.”

Vitner cautioned the persistent supply-demand imbalance has driven prices higher across the country and worsened affordability concerns. “Home prices have risen about three times faster than inflation and twice as fast as income growth over the past year,” he said. “Home prices are approaching prior peaks broadly, with eight of 20 markets already there. Rising home prices are fueling an affordability migration but there are fewer affordable markets left.”

Cheryl Young, senior economist with Trulia, San Francisco, said early versions of the tax reform bill in November threatened to put downward pressure on prices in expensive and high tax areas as proposals on caps to the mortgage interest tax deduction and state and local tax deductions ding demand. But the proposals didn’t cause a ripple in November home prices.

“Lower and middle-income home seekers faced the strongest headwinds as exceedingly low supply grips the starter and trade-up submarkets despite sustained demand,” Young said.

The S&P report said home prices are now back at their fall 2007 levels.