Tag Archives: House price index

JCHS: How Helpful is the Price-to-Income Ratio in Flagging Bubbles?

How Helpful is the Price-to-Income Ratio in Flagging Bubbles?

 by Rocio Sanchez-Moyano
Research Assistant
With the continued growth of house prices across the country, talk of a housing bubble is beginning to reappear in the headlines. House price-to-income ratios are often used to indicate a bubble, as prices have historically had a relatively stable relationship with incomes (both mean and median).  In the US, nationally, the price-to-income ratio remained relatively stable throughout the 1990s.  It began to increase around 2000 and surpassed its long-run average of 3.65 by 2002 (Figure 1).  The national price-to-income ratio continued to increase in the mid-2000s, reaching a high of 4.63 in 2006 before rapidly declining in 2007 and 2008 and eventually hitting a low of 3.26 in 2011.  The classic bubble shape is clearly visible in this trend.  Recent price gains, viewed in this context, do not seem to indicate the return of a bubble; price-to-income ratios today match their early 1990s rates and still have some room for growth before reaching their long-run average.  (Click chart to enlarge.)
 091613_Rocio_figure1
Notes: Prices are 1991 National Association of Realtors® Median Existing Single-Family Home Prices, indexed by the FHFA Expanded-Data House Price Index.  Incomes are median household incomes.
Sources: JCHS tabulations of FHFA Expanded-Data House Price Index;  US Census Bureau, Moody’s Analytics Estimates.
However, despite the seemingly straightforward relationship between house prices and incomes in Figure 1, this indicator can be difficult to interpret.  To start, many data sources are available for measuring prices.  One used frequently is the National Association of Realtors ® (NAR) Single-Family Median Home Price as it is widely available for many metros and provides an actual house price (rather than an index showing change in values) that can be compared to income levels.  The disadvantage to this measure is that NAR house prices also capture changes in the types of units that are being sold over time and so does not reflect how the value of the same home changes.  Repeat sales indices, like the Federal Housing Finance Authority’s (FHFA) Expanded-Data House Price Index, which was used to produce the figures in this post, are designed to take into account changes in the values of homes themselves by tracking sales of the same homes over time.  However, the FHFA index can be more difficult to interpret since, as an index, it does not provide information about current prices.  Price-to-income ratios using this data must peg the index to a starting or ending house price.
Furthermore, identifying bubbles or other price anomalies from price-to-income ratios can be difficult because it is not clear what is an appropriate baseline value of the measure for comparison.  Even in the aggregate US case, where the ratio did not fluctuate more than one percent in either direction for much of the 1990s, the linear trend is not flat and the long run average is above the 1990s levels.  This becomes even murkier when observing trends at the metro level.  Some metros, like Dallas, had stable price-to-income ratios over the last two decades (Figure 2).  Dallas did not experience a significant bubble in the mid-2000s and its long-run average mirrors the linear trend.  In other metros, like Phoenix, the boom-bust period led to significant fluctuations in the price-to-income ratio after having been relatively stable in the 1990s.  If the 1990s levels are to be considered normal for Phoenix, then current price-to-income ratios remain below average and recent growth in prices can be considered a return to normal after an overcorrection.
For other metros, the price-to-income trend is more difficult to interpret.  Ratios in Cleveland are well below their long-run average, but the historical trend has been drifting downwards, so ratios in recent years could be indicating a reset of the ratio in Cleveland to lower levels.  At another end, San Francisco has experienced a wide range of price-to-income ratios in recent history.  Price-to-income ratios boomed in the late 1980s, decreased throughout much of the 1990s, and then surged through the mid-2000s.  Compared to its long-run average, ratios in San Francisco are above historical norms, but, when the historical trend is considered, prices can continue to increase before they appear “too high.”  Finally, if a fundamental relationship exists between prices and incomes, it is unclear why the ratio can vary significantly from metro to metro.  The national average is around 3.6.  In the metros observed here, Cleveland and Dallas both have historic averages below 3.0 while San Francisco’s is double the national average. (Click chart to enlarge.)
 091613_Rocio_figure2_sm
Notes: Prices are 1991 National Association of Realtors® Median Existing Single-Family Home Prices, indexed by the FHFA Expanded-Data House Price Index.  Incomes are median household incomes.
Sources: JCHS tabulations of FHFA Expanded-Data House Price Index;  US Census Bureau, Moody’s Analytics Estimates
Given this variation, what can we make of the price-to-income ratio?  On a national level, this ratio does a relatively good job of identifying substantive shifts in the market.  In the aggregate, there appears to be a “normal” price-to-income ratio and prolonged deviation from this trend can signal an underlying shift.  However, on a metro-by-metro level, where it can be difficult to identify an appropriate baseline value, long-run historical context is necessary to interpret point-in-time estimates.  In markets like Dallas and Phoenix, historical trends are consistent enough that it can be useful to compare the current ratio to past ones.  In others, like Cleveland and San Francisco, the price-to-income ratio on its own is not especially helpful since there is no clear way to identify a “normal” price-to-income ratio.

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CR: The Two Bottoms for Housing

Update: The Two Bottoms for Housing

by Bill McBride on 5/24/2013  

By request, I’ve updated the graphs in this post with the most recent data. Last year when I wrote The Housing Bottom is Here and Housing: The Two Bottoms, I pointed out there are usually two bottoms for housing: the first for new home sales, housing starts and residential investment, and the second bottom is for house prices.

For the bottom in activity, I presented a graph of Single family housing starts, New Home Sales, and Residential Investment (RI) as a percent of GDP.

When I posted that graph, the bottom wasn’t obvious to everyone. Now it is, and here is another update to that graph.

Starts, new home sales, residential Investment Click on graph for larger image.

The arrows point to some of the earlier peaks and troughs for these three measures.

The purpose of this graph is to show that these three indicators generally reach peaks and troughs together. Note that Residential Investment is quarterly and single-family starts and new home sales are monthly.

For the recent housing bust, the bottom was spread over a few years from 2009 into 2011. This was a long flat bottom – something a number of us predicted given the overhang of existing vacant housing units.

We could use any of these three measures to determine the first bottom, and then use the other two to confirm the bottom. These measure are very important and are probably the best leading indicators for the economy. But this says nothing about house prices.

Residential Investment and House prices The second graph compares RI as a percent of GDP with the real (adjusted for inflation) CoreLogic house price index through February.

Although the CoreLogic data only goes back to 1976, look at what happened following the early ’90s housing bust. RI as a percent of GDP bottomed in Q1 1991, but real house prices didn’t bottom until Q4 1996 (real prices were mostly flat for several years). Something similar happened in the early 1980s – first activity bottomed, and then real prices – although the two bottoms were closer in the ’80s.

Now it appears activity bottomed in 2009 through 2011 (depending on the measure) and real house prices bottomed in early 2012.

Read more at http://www.calculatedriskblog.com/2013/05/update-two-bottoms-for-housing.html#Xos7EeY1TxJ1aVPg.99

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CR: Real House Prices, Price-to-Rent Ratio, City Prices relative to 2000

Real House Prices, Price-to-Rent Ratio, City Prices relative to 2000

by Bill McBride on 3/26/2013  

Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio.

As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation.  This is why economist also look at real house prices (inflation adjusted).

Nominal House Prices

Nominal House PricesThe first graph shows the quarterly Case-Shiller National Index SA (through Q4 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through January) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to Q2 2003 levels (and also back up to Q3 2010), and the Case-Shiller Composite 20 Index (SA) is back to November 2003 levels, and the CoreLogic index (NSA) is back to January 2004.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to October 1999 levels, the Composite 20 index is back to December 2000, and the CoreLogic index back to February 2001.

In real terms, most of the appreciation in the last decade is gone.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners’ Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q4 1999 levels, the Composite 20 index is back to December 2000 levels, and the CoreLogic index is back to February 2001.

In real terms – and as a price-to-rent ratio – prices are mostly back to early 2000 levels.

Nominal Prices: Cities relative to Jan 2000

Case-Shiller CitiesThe last graph shows the bubble peak, the post bubble minimum, and current nominal prices relative to January 2000 prices for all the Case-Shiller cities in nominal terms.

As an example, at the peak, prices in Phoenix were 127% above the January 2000 level. Then prices in Phoenix fell slightly below the January 2000 level, and are now up 27% above January 2000 (I’ll look at this in real terms later). Some cities – like Denver – are close to the peak level. Other cities, like Atlanta and Detroit, are below the January 2000 level.

Read more at http://www.calculatedriskblog.com/2013/03/real-house-prices-price-to-rent-ratio.html#XwaRVmDdktvPvaDC.99

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PragCap: Housing Prices Are Booming Again….

Housing Prices Are Booming Again….

03/05/2013

Looks like the nominal wealth boom isn’t solely a stock market phenomenon.  The Fed might just be getting the boom they want (at least in the asset classes that make people feel wealthier than they really are)….According to CoreLogic, home prices in the USA are back to bubble-era type appreciation levels:

“CoreLogic (NYSE: CLGX), a leading residential property information, analytics and services provider, today released its January CoreLogic HPI report.

Home prices nationwide, including distressed sales, increased on a year-over-year basis by 9.7 percent in January 2013 compared to January 2012. This change represents the biggest increase since April 2006 and the 11 th consecutive monthly increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 0.7 percent in January 2013 compared to December 2012. The HPI analysis shows that all but two states, Delaware and Illinois, are experiencing year-over-year price gains.”

Chart via CoreLogic:

clogic Housing Prices Are Booming Again....

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PRAGCAP: Home Prices – Is the Boom Back?

Home Prices – Is the Boom Back?

02/06/2013

If you’re looking for things I’ve been wrong about recently you can chalk housing up on the list.  Last year I said I expected housing’s downside was fairly limited and said that long-term buyers shouldn’t hesitate to buy, but that the market was likely to muddle through in a classic post-bubble workout period.  Now, it might be a bit too early to declare a new boom, but the latest data from CoreLogic certainly looks very positive and has to have us all asking the question – is the next boom already beginning?

More via CoreLogic:

Home prices nationwide, including distressed sales, increased on a year-over-year basis by 8.3 percent in December 2012 compared to December 2011. This change represents the biggest increase since May 2006 and the 10th consecutive monthly increase in home prices nationally.

“December marked 10 consecutive months of year-over-year home price improvements, and the strongest growth since the height of the last housing boom more than six years ago,” said Mark Fleming, chief economist for CoreLogic. “We expect price growth to continue in January as our Pending HPI shows strong year-over-year appreciation.”

“We are heading into 2013 with home prices on the rebound,” said Anand Nallathambi, president and CEO of CoreLogic. “The upward trend in home prices in 2012 was broad based with 46 of 50 states registering gains for the year. All signals point to a continued improvement in the fundamentals underpinning the U.S. housing market recovery.”

clogic Home Prices   Is the Boom Back?

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Real House Prices, Price-to-Rent Ratio

Real House Prices, Price-to-Rent Ratio

by Bill McBride on 11/27/2012  

Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio.

As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation.

For the Case-Shiller National index, real prices declined slightly in Q3, and are up 1.7% year-over-year. The nominal Case-Shiller National index is up 3.6% year-over-year.

Real prices, and the price-to-rent ratio, are back to late 1999 to 2000 levels depending on the index.

Nominal House Prices

Nominal House PricesClick on graph for larger image.

The first graph shows the quarterly Case-Shiller National Index SA (through Q3 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through September) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to Q1 2003 levels (and also back up to Q3 2010), and the Case-Shiller Composite 20 Index (SA) is back to August 2003 levels, and the CoreLogic index (NSA) is back to December 2003.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to mid-1999 levels, the Composite 20 index is back to June 2000, and the CoreLogic index back to February 2001.

In real terms, most of the appreciation in the last decade is gone.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners’ Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q3 1999 levels, the Composite 20 index is back to July 2000 levels, and the CoreLogic index is back to February 2001.

In real terms – and as a price-to-rent ratio – prices are mostly back to 1999 or early 2000 levels.

I think nominal house prices have bottomed, but I expect real prices to mostly move sideways for the next year or two.

Read more at http://www.calculatedriskblog.com/2012/11/real-house-prices-price-to-rent-ratio.html#bS8Beyvy9qpOtMQZ.99

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The Real Winner of a Housing Recovery: State Governments — PragCap

The Real Winner of a Housing Recovery: State Governments

  • 09/07/2012

By Rom Badilla, CFA, Bondsquawk

Recent data releases suggest that housing may have finally bottomed and a turnaround is near. Historical low interest rates coupled with a dwindling of the current stock of housing in inventory has contributed to the reversal. This is evident in the latest release of the S&P/Case-Shiller Home Price Index for June which increased 1.22% on national level surpassing market expectations.

Furthermore, JP Morgan’s Head of US Municipal Strategy, Chris Mauro, wrote in his latest U.S. Municipal Notes, that data provided by the Federal Housing Finance Agency reinforces the belief of a recovery. In particular, quarterly housing price index (HPI) numbers appreciated in many states across the country:

In 2Q2012 the HPIs increased in 46 states on a quarter/quarter basis and in 39 states year/year. We find it encouraging that even some of the hardest hit “housing bust” states are beginning to see home prices move off the bottom. For example, Arizona registered the largest percentage price increase among all the states. While still down nearly 50% from its 2006 peak, Arizona’s HPI is up over 13% year/year.

In addition to easing the pain of many homeowners who are underwater on their mortgages, the reversal and firming of the housing market is a “bright spot” for the local government sector.

These credits have seen their two most significant sources of revenue, property taxes and state aid, come under significant pressure since the beginning of the 2008-2009 recession. According to the Rockefeller Institute of Government, local property taxes have now declined for six consecutive quarters in real terms. While we expect that state aid will continue to be significantly depressed for some time, a bottoming in property values should help to eventually stop the hemorrhaging in property tax revenues. This will indeed be a positive development for local governments, a sector of the market that has seen little in the way of good news in recent years.

Sustained gains in housing should help property tax revenues reverse course for local governments. As we talked about here several weeks ago, a reluctance to spend due to tighter fiscal budgets is having an effect on the municipal market. In particular, with no new projects, there is little need to access the capital markets in the form of new issue bonds. As a result, supply for municipal bonds has been tapering off. Given the early signs of a housing turnaround which could domino into a recapturing some of the lost revenue stemming from the recession, the municipal market could see a reemergence of supply at some point in the future.

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