April 30, 2013 (Housing Market Monitor)

By Dean Baker

Rapid run-up in prices in the bottom tier should be a cause for a concern.

The Case-Shiller 20-City Index rose by 1.2 percent in February, with all of the cities showing substantial gains. Prices are now up by 9.3 percent from their year-ago levels and have risen at a 13.4 percent annual rate in the last three months.

The biggest gains were in Las Vegas, which saw prices rise by 2.0 percent rise in February. Prices in Los Angeles, Phoenix, and San Francisco all rose by 1.8 percent. Prices in Tampa rose by 1.4 percent. Cleveland and Washington, D.C., had the slowest rates of increase at 0.3 percent, followed by Charlotte at 0.4 percent, and New York and Seattle at 0.5 percent.

As has been the case throughout the last year, the price increases have been driven in large part by rapid price growth in the bottom tier of the market. While prices overall in Phoenix have risen by 23.0 percent over the last year, prices for homes in the bottom third of the market have risen by 39.0 percent. There are many markets in the Phoenix area where the year-over-year increase has been more than 40 percent.

There is a similar story in many of the other former bubble markets. In the last year, prices in Las Vegas have risen by 17.6 percent. For the bottom tier, prices over the year are up by 34.2 percent. In the last three months prices for homes in the bottom tier of the market have risen by an incredible 56.2 percent.

Prices for homes in the bottom tier in Atlanta rose 4.3 percent in February and are up 37.0 percent over the last year. They have risen at a 70.0 percent annual rate over the last three months. It is worth pointing out that these prices were quite depressed after the crash and are still well below their pre-bubble levels.

Interestingly, the price increases in San Francisco and Los Angeles have not been tilted toward the bottom to the same extent. Prices for homes in the bottom tier in San Francisco rose by 1.6 percent last month compared with 3.2 percent for the middle tier. Over the last year there has been little difference with prices for bottom tier homes rising by 21.6 percent compared with 18.8 percent for the middle tier.

In Los Angeles prices for homes in the middle tier rose 3.0 percent in February compared with 1.4 percent for homes in the bottom tier. Over the last year prices in the middle tier have risen 13.4 percent compared with 16.5 percent for homes in the bottom tier.

The rapid run-up in prices also seems to be hitting many of the central California cities that were at the epicenter of the housing bubble. Prices in many neighborhoods in places such as Vallejo, Modesto, and Stockton have risen by 20 percent or more over the last year.


This rapid increase in house prices should be prompting serious concern among regulators. At the moment, it is not driving the economy in the same way as the housing bubble did in the last decade. Construction is still at very low levels, so a plunge in prices could not have impact on the economy through this channel. While saving rates are again low, possibly due in part to increasing home equity, it is likely that the data are somewhat distorted by the large dividend payouts of the fourth quarter. If the saving rate remains below 3.0 percent into the second half of the year (the post-World War II average is more than 8.0 percent) then this would suggest that inflated house prices are playing a role. If that is the case, a decline in house prices would lead to another hit to consumption.

However the main reason that the rapid run-up in prices in the bottom tier should be a cause for a concern is that moderate-income homebuyers may again take a big hit if these prices plunge in a correction.