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The Ascent Continues

April 10, 2017


Another week and another indicator show that home prices continue to rise relentlessly. 

The S&P/Case-Shiller Home Price Index confirmed last week what we already know: homes prices continue to rise, as they have since the end of the 2009 recession. This week CoreLogic seconds the confirmation: Its home price index showed prices in February were up 1% month over month. Year over year, CoreLogic’s index shows that prices are up 7%.

CoreLogic sees no end in sight. Its soothsayers see their home price index rising 4.7% in 2017, with monthly increases coming in 0.4% increments. 

Most of the major home-price-data providers  — Case-Shiller, CoreLogic, Trulia, Zillow — present their numbers based on a distilled national average of prices. All these national averages have been rising consecutively month-over-month for the past five years. The relentless ascent has upped the “bubble” chatter. 

But as we mentioned last week, there is a mitigating factor to bubble concerns: The indexes are reported in nominal dollars. When adjusted for consumer-price inflation, prices are somewhat less bubbly. In real terms (inflation adjusted), prices are actually still below the 2006 peaks. 

But we have another concern related to relentlessly rising prices: reduced affordability. 

The U.S. Home Affordability Index from ATTOM Data Solutions shows affordability at its lowest level in eight years. In the first quarter, affordability slipped below the average historical lows in 25% of the markets ATTOM follows. 

But again we have a mitigating factor: Averages rarely, if even apply, to any single market. (In fact, averages rarely apply to any individual or any single business.)  What’s occurring in the housing market in San Francisco could be diametrically opposed to what’s occurring in the housing market in Houston. If the two markets are averaged, a figure is produced that would likely be meaningless in describing the economic reality of either market. 

Yes, we frequently report the big nationwide macro numbers (the averages and the aggregates). But it’s important to remember that these numbers have no independent life of their own that’s separate from the individual markets that form them. 

The fact is that most business people have little use for the macro data as it pertains to their own business. But there’s a reason we report them: other people follow them and react to them. 

Therefore, a businessperson cannot afford to ignore changes in the macro data — such as national average home prices or national median home prices or national mortgage rates — that governments and central bankers will respond to. For example, if the Federal Reserve is expected to tighten its monetary stance in response to strengthening gross domestic product, business people need to account for the change in monetary policy in order to better gauge the future and to better manage their businesses. 

So there is some value in reporting macro numbers, but the micro numbers (doings in the local market) are always the more important numbers in managing daily business operations. 

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