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Nine years after it began, the catastrophic national home-price bust is over, according to the latest report by the S&P CoreLogic Case-Shiller U.S. National Home Price Index, a widely followed gauge.
Home prices rose 5.5 percent in the United States in the last 12 months, the report says, adding:
Seattle, Portland, and Denver reported the highest year-over-year gains among the 20 cities over each of the last eight months. In September, Seattle led the way with an 11-percent year-over-year price increase, followed by Portland with 10.9 percent, and Denver with an 8.7-percent increase. 12 cities reported greater price increases in the year ending September 2016 versus the year ending August 2016.
A bit of history
For context, here’s a bit of recent housing history:
Home prices reached an all-time peak in July 2006, having shot straight up for 10 years.
As The Economist writes: “The crash that followed brought the entire global financial system to its knees.” The crash picked up speed in 2008 and finally reached bottom in 2012.
The S&P national home price index fell 27.4 percent from the 2006 high to the 2012 low. A sub-index of just 10 of the biggest U.S. cities showed prices fell 35.3 percent, says U.S. News.
This September, the Case-Shiller home price index broke the 2006 record, hitting 1 percent over the previous high.
It’s been a hearty recovery, by that measure. Prices rose 5.5 percent between September 2015 and September 2016, faster even than the 5.1 percent annual gain between August 2015 and 2016.
CNBC analyst Bob Wetenhall expects prices to grow, on average, 5 percent more in 2017.
Wealthy enclaves, in wealthier markets
The price gains are good news for homeowners, for the economy at large and for the housing industry. But the numbers obscure a more complex story: The strongest growth is in wealthy markets, and within wealthy enclaves within those markets.
The Case-Shiller index uses data from 20 urban areas (Cleveland, Dallas, Denver, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, New York, Phoenix, Portland, San Diego, San Francisco, Seattle, Tampa and Washington, D.C.), reflecting their growth but excluding markets in the rest of the country.
Other cities aren’t doing as well. Writes Trulia’s chief economist, Ralph McLaughlin:
The housing market recovery has been very uneven across the U.S. When controlling for inflation, markets that have reached their pre-recession peaks are few and almost exclusively in the West and South. And within those markets, it’s mostly high-end homes that have surpassed the peak.
Zillow’s home-price index, which takes more markets into account, remains 2.7 percent below the pre-bust home-price peak.
And one more thing: Today’s market gains match historical highs only if you ignore inflation. Writes Trulia’s McLaughlin:
[C]rossing this threshold is largely symbolic. After controlling for inflation, home prices in the U.S. are still about 20% below the peak.
Not a bubble, but …
These levels of growth may be hard to sustain, because:
- Home prices outstrip income gains. If workers can’t afford to buy homes, demand seems likely to taper off. “Home prices have grown at an inflation-adjusted annual rate of 5.9% since 2012, while incomes have grown by just 1.3%, according to Case-Shiller,” The Wall Street Journal notes.
- Mortgage rates are rising. After years spent a historic lows, mortgage rates have risen lately. Higher rates make it harder for buyers to afford a home.
- Homeownership is (way) down. The rate of homeownership in the U.S. fell this year to 62.9 percent, the lowest in half a century, according to Bloomberg. Homeownership reached its highest level, 69.2 percent, in the second quarter of 2004, just before the housing collapse, Census Bureau data show. Some see the falling rate as a bad sign, since rising homeownership helps to grow the middle class, contribute to the economy and stabilize society. “There are signs that lenders aren’t making loans to thousands of people who pose little credit risk,” the Journal reports. Others believe that lower homeownership reflects homebuyers’ true qualifications. The lower rate can be read as evidence of risky and irrational pre-bust lending practices coming to an end after the Dodd-Frank Wall Street Reform and Consumer Protection Act tightened mortgage lending rules in 2010.
To Trulia’s McLaughlin, the rate is a mixed bag. McLaughlin tells Bloomberg that it includes:
“… renter households … growing at a much faster rate than owner households, reflecting growing confidence of those who were most likely impacted by the foreclosure crisis. Still, low inventory and affordability plagues those who do want to buy a home.”
Signs of strength
“Uneven” is the word analysts frequently use to describe this housing recovery. A few wealthier markets are outperforming most of the others. Even within those markets, “it’s mostly high-end homes that have surpassed the peak,” McLaughlin writes. But there are at least a couple of signs the market can continue to grow healthier:
First-time buyers growing. At the same time, the ranks of first-time buyers are growing, an encouraging sign. The participation of first-time buyers is seen as a sign of the market’s health and the accessibility of homes to a broad range of people. In September this year, first-time buyers reached 34 percent of all sales, a high not seen in more than four years, reported the National Association of Realtors. In 2015, first-time buyers had only a 30 percent share of the market.
“Underwater” homes shrinking. The recession’s ghost still hovers: 12 percent of current mortgages still are “underwater,” or worth more than the value of the home. But that is a far cry from the bottom of the crash, when nearly a third of homes with mortgages were underwater.
McLaughlin sums up the problem: “This uneven housing market recovery reflects the nature of the broader economic recovery: job, wage, and population growth has occurred disproportionately in the South and West.”
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