January 28, 2014

By Dean Baker

After seeing a boom in the first half of 2013 that threatened to send prices in many markets back into bubble territory, it appears that the housing market has moved back onto a sustainable path. Nonetheless, there are still several markets where continuing prices rises pose concerns.

There were several releases in the last month that gave renewed evidence of moderation. Most importantly, the report on new home sales for December showed both a drop for the month and a downward revision to the November data. The December figure was below any other month in the first half of the year. Since sales data are based on contracts signed, this gives us a reasonably good view of the current state of the market.

In that same vein, the mortgage applications index for new mortgages has generally been running below year-ago levels over the last two months. This also gives fairly current information on the state of the market. The existing home sales data, which lag the market somewhat since they are based on completed sales, also show a weakening market. The sales numbers for November and December were the two lowest months of the year, with the December figure being slightly below the year-ago level.

In addition, housing starts fell off in December, dropping 9.8 percent from November. The report showed starts at a 999,000 annual rate in December, just 1.6 percent above the year-ago rate. Starts will probably continue on an upward path through 2014, but with vacancy rates still well above normal levels, it was unreasonable to expect a new boom in construction. The extent of unmet demand for housing is also likely overstated by simple extrapolations, since baby boomers are now retiring and downsizing in large numbers.

The Case-Shiller 20 City Index indicates some moderation in the rate of price increase, although the index still rose 0.9 percent in November. It is up 13.7 percent over the last year, with prices having risen at a 12.4 percent annual rate. With prices at the high side of their trend level, if this pace of increase were to continue there would be a real basis for concern about the return of the bubble.

The positive in this picture is that some of the largest increases in the November data were not in the markets that risk returning to bubble territory. For example, the 1.6 percent rise in Atlanta led the group, with the Boston and Detroit indexes both rising 1.3 percent; Cleveland rose 1.2 percent; and Dallas, 1.0 percent. None of these markets had seen rapidly rising prices earlier in the year except Atlanta, where prices are still badly depressed.

Some of the potential bubble markets did also show rapid price gains, with prices in Miami rising 1.6 percent; San Francisco 1.3 percent; Las Vegas 1.2 percent; and Tampa 1.1 percent. But even in most of these markets the bottom end was not the main factor driving the price rises as had previously been the case. In Miami prices for homes in the bottom third of the market rose just 0.4 percent, compared to 1.5 percent for the top tier and 1.6 percent for the middle tier. Prices for the bottom tier are up 28.2 percent for the last year.

Price for homes in the bottom tier in San Francisco rose just 0.4 percent. In Las Vegas they fell 0.3 percent. However, in Tampa prices for homes in the bottom tier rose by 3.5 percent in November, they are up 28.4 percent over the last year. House prices in Tampa did take a big hit in the downturn, but if they continue to rise at this pace for much longer, they will certainly be back in bubble territory. By comparison, rents in the city have risen at a 1.0 percent annual rate.

On the whole the data look positive in the sense that it mostly shows evidence of a slowing housing market. While there may not be an immediate basis for concern that the economy will again be driven by a housing bubble, there was a real risk that many homeowners could again find themselves buying houses at bubble-inflated prices. This risk seems to be fading.

CEPR's Housing Market Monitor is published monthly and provides an incisive breakdown of the latest indicators and developments in the housing sector. Contact This email address is being protected from spambots. You need JavaScript enabled to view it. for more information or sign up to receive our data bytes via email.