June 25, 2013 (Housing Market Monitor)

By Dean Baker

The current rate of existing home sales is far above its pre-bubble level.

The Case-Shiller 20-City Index rose by 1.7 percent in April, with all 20 cities again showing substantial gains. Prices are now up by 12.1 percent from their year-ago levels and have risen at a 21.5 percent annual rate in the last three months.

San Diego had the most rapid price increase at 2.8 percent, followed by Minneapolis, Los Angeles, and San Francisco at 2.7 percent. Prices rose by 2.6 percent in April in Miami, with prices rising in Las Vegas by 2.3 percent. At the other end, prices rose by just 0.1 percent in Cleveland and by 0.7 percent in Detroit and Denver.

The April price rises in the California cities continue a pattern of rapid price increases in recent months. In San Diego prices have increased at a 25.4 percent annual rate over the last three months and 14.7 percent over the last year. In Los Angeles prices have risen at a 32.4 percent rate over the last three months and 18.7 percent over the last year. In San Francisco the increases are 38.7 percent and 23.9 percent, respectively. Prices in Las Vegas have risen at a 33.4 percent annual rate over the last three months and 22.2 percent rate over the last year.

The rapid run-up in prices continues to be driven largely by the bottom third of the housing market. Prices for homes in the bottom tier in San Diego have risen at a 31.1 percent annual rate over the last three months and 21.5 percent over the last year. In Los Angeles prices for homes in the bottom tier rose by 3.6 percent in April and have risen at a 39.7 percent rate over the last three months. In San Francisco the April increase was 4.8 percent, bringing the increase over the last year to 30.2 percent. In Las Vegas, a 4.0 percent rise in April brought the annual rate over the last three months to 72.4 percent. In Minneapolis the rise of 5.3 percent in April pushed the rate over the last three months to 56.3 percent. In Miami, prices in the bottom tier rose by 4.8 percent to bring the annual rate over the last three months to 48.2 percent.

All of these cities’ prices still have a long way to go to get back to their bubble peaks. Only the California cities have price levels that could even be plausibly be considered to be bubbles. However, with prices rising at extraordinary rates in many areas, it will not be long before these markets will again be seeing bubbles if this rate of increase continues. In this respect, it is striking that the bottom tier has consistently been experiencing the largest run-up in prices. There has been much investor activity in this segment of the market, which undoubtedly is a major factor driving home prices higher. There would be little ground for concern if investors end up paying too much for houses and end losing in another adjustment. However, homeowners will inevitably get caught up in this sort of boom-bust cycle with many likely paying too much for a house and ending up underwater after prices correct.


Other housing measures are also showing rapid improvements. Core Logic’s measure of 90-day delinquency rate is down by 1.2 percentage points from its year-ago level, while its foreclosure rates are down by 0.86 percentage points, a drop of almost one-quarter. May sales of new homes were up 2.1 percent from April and 29.0 percent from year-ago levels. For existing homes the May rise was 4.2 percent from April and 12.9 percent compared with the year-ago level.

Many analysts seem confused about what to expect from existing home sales, pushing stories about underwater homeowners who are unable to sell depressing the sales volume. While there are undoubtedly many homeowners who can’t sell for this reason, sales volume has pretty much recovered to its pre-bubble rates. The current sales rate is close to 40 percent above the mid-1990s rate. Since population has grown by less than 20 percent, sales are somewhat higher than we should be expecting.

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