The US housing market part 1: National changes in prices over 20 years

One of the common themes you’ll find on this blog is about housing submarkets. I have a whole series on this coming up, but for the purposes of this post, I will say this:

Whilst macro factors absolutely affect housing markets, submarkets respond very differently, and submarkets within submarkets. If you’re a central banker, you care about the aggregated numbers. If you’re a REIT manager or investor, you probably care about a pretty big submarket. But if you’re a real estate investor, you care much more about your street, your suburb and your city.

You could be forgiven for thinking that every house in the US was almost worthless. If we look at the data though, we’ll see some prices have crashed, some have fallen, some have flatlined and some have increased throughout the housing ‘crash’.

I say’crash’ because whilst the falls in some submarkets have been severe, they’ve been relatively benign in others.

The following analysis is based on HPI (house price index) data through to Q1 2011 from the Federal Housing Finance Agency. It is computed from repeated transactions for mortgages arranged through Fannie Mae and Freddie Mac. I.e., not every transaction, but a very large sample. A detailed methodology is available here.

So, firstly, the big picture:

  US Housing Price Index 1991-2011

US Housing Price Index 1991-2011

  Source: FHFA

This is the entire US market over the last 20 years. Not unsurprisingly, there was a large run-up in prices, followed by a correction starting around 2007.

There is no doubting there’s been a large correction, but it this really a crash? Before I actually looked at the data, I expected much more severe falls than that.

As we’ll see in part 2, some submarkets have recorded precipitous falls indeed, but others not…

Notes on Case Schiller

When I first analysed the data, I was surprised the correction wasn’t steeper. I think one of the causes is that the most quoted house price index in the mainstream is Case Schiller. In my opinion, Case Schiller exaggerates movements by:

– Restricting to the 20 largest metro areas
– Value weighting transactions, such that more expensive houses skew the market

To illustrate, here is the shape of Case Schiller composite 20 over the same time period.

Case schiller total only

Clearly volatility has been more severe in the major metropolitan markets. If we’re going to talk about the ‘US Housing Market’, I see no reason to restrict to major metro markets and for that reason, will be sticking to the FHFA data where possible.


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