The Standard & Poor’s Case-Shiller house price index (HPI) continued to decline in October, with the Composite 20 index (CS20) falling 1.3% (not seasonally adjusted) and the Composite 10 (CS10) index down 1.2% (NSA). (As noted in the past, when observing the Case-Shiller HPI attention should be focused on the NSA numbers.) This is the third consecutive month of decline. Year-over-year there has been little change in the index, with the CS10 up 0.2% and the CS20 is down 0.8% relative to October 2009 (Figure 1).
The recent decline in the indexes are a reflection of the period covered. The Case-Shiller HPIs are a three-month moving average of house prices, with the October reading including sales from August, September and October. Therefore, the index continues to reflect softening in house prices due to the weak housing demand in third quarter.
The press release announcing the October HPI paints a gloomy picture. “… all 20 MSAs and both composites were down in October over September.” While “… six markets – Atlanta, Charlotte, Miami, Portland (OR), Seattle and Tampa – hit their lowest levels since home prices started to fall in 2006 and 2007.” However, the discussion misses the big picture and overlooks the widely different trends in house prices across the MSAs over the past decade. A narrow read of these numbers suggest Las Vegas and Washington DC are the two best markets, when in fact they’re trending in opposite directions. Similarly, based on these numbers, Atlanta would be the worst market when in fact it had no price bubble and a modest downturn, but high volatility over the past 20 months (Figure 2).
The high volatility in house prices over the past 20 months is a side effect of the government assistance programs that have attempted to stem the decline in house prices and assist the recovery in the housing demand. The introduction and subsequent expiration of homebuyer tax credits provided a short boost to housing demand followed by a downturn. Overall, the tax credits were effective in stopping the free fall in house prices, and, despite the volatility in the HPI over the past 20 months, have led to an increase in overall house prices, with the CS20 index up 4% and the CS10 up 6% from their low in April 2009.
The HPIs in the individual MSAs have behaved very differently over the past decade and the trends over this period go some way to explaining their rise or fall over the past 20 months.
The Californian MSAs (Los Angles, San Francisco and San Diego), Minneapolis and Washington DC all posted strong gains between 2002 and 2006, before a downturn from 2007 to early 2009. However since early 2009, prices in these MSAs have risen strongly and, despite recent price declines, are between 9% and 18% above their level at the trough.
Miami, Tampa, Phoenix and Las Vegas – MSAs greatly affected by the boom and bust in housing demand – experienced a very sharp run up in prices between 2003 and mid-2006, before a very sharp decline that plunged house prices below their level in 2001, by early 2009. Since 2009 house prices have been volatile, but overall the trend has been flat, with current prices either slightly over or slightly under their level in early 2009.
New York, Portland and Seattle, experienced relatively strong gains from 2000 to 2006, before a moderate decline between 2007 and early-2009, returning prices to around 2003-04 levels. Prices in these MSAs have remained relatively flat since early 2009, with prices around their level in early 2009.
Other MSAs (Atlanta, Boston, Charlotte, Cleveland, Dallas and Denver) saw only a slight rise in price between 2000 and 2007, and subsequently experienced only a small price decline. These markets have experienced the highest volatility in house prices over the past 20 months. Since early-2009, the HPI in these MSAs have trended down slightly, but this should not be over interpreted, as the overall HPI decline has been small.
Despite the recent declines, we maintain the view that that house prices will show some volatility through the end of 2010, but will continue the trend of modest positive growth experienced since early 2009, with no further significant declines. We expect house prices to remain flat in 2011 then show modest growth (around 1.4%) in 2012. However, as noted earlier the impact on the MSAs will be different, such that some MSAs will experience much stronger house price growth, while the growth will be weaker in other MSAs.
Eye on Housing 
The problem with Case Shiller is that the index is dominated by the largest MSAs in the country. Get outside of Atlanta and Los Angeles and you will find many mid-to-small MSAs that have been on the rebound for months.