In the last several days, a new milestone has been reached in a widely reported measure of housing prices, according to the S&P CoreLogic Case-Shiller Indices, the leading measure of U.S. home prices. Their data shows that for November 2016, home prices continued their rise across the country over the prior 12 months, and have now reached their all-time, pre-recession high.
And the gains are widespread, with some markets recovering, and even exceeding, their previous pre-recession peaks, while other markets are experiencing a shallower glidepath back to their own highs. For instance, Seattle, Portland, Ore., and Denver reported the highest year-over-year gains among 20 cities over each of the last 10 months.
In November, Seattle led the way with a blistering 10.4% year-over-year price increase, followed by Portland with 10.1%, and Denver with an 8.7% increase. Eight cities reported greater price increases in the year ending November 2016 versus the year ending October 2016.
Still, prices have not fully recovered in many cities, and other gauges show that home prices remain below their peaks. These include markets that have seen large gains since the downturn, such as Miami, Tampa, Fla., Phoenix, and Las Vegas, so it is easy to understand why many experts caution that imbalances remain in the housing market.
The index reported a 5.6% annual gain in November, up from 5.5% in October, which is identical to the 5.5% annual rate over the last two-and-a-half years. This is an all-time high, so it appears that housing has recovered from the boom-bust cycle that began a dozen years ago when values peaked in July 2006.
Almost full employment
The recovery has been supported by several factors: low interest rates, falling unemployment, and consistent gains in per-capita disposable personal income. Also, 30-year fixed rate mortgages dropped under 4.5% in 2011 and have only recently shown hints of rising above that level. The 4.8% unemployment rate is close to the Fed’s full employment target, and inflation adjusted per-capita personal disposable income has risen at about a 2.5% annual rate for 30 months.
Further, the Trump Administration is seeking faster economic growth, increased investment in infrastructure, and changes in tax policy which could affect housing and home prices. Mortgage rates have increased since the election, and stronger economic growth could push them higher. Further gains in personal income and employment may increase the demand for housing and add to price pressures when home prices are already rising about twice as fast as inflation.
The index's new peak marks a shift from the housing recovery to the hoped-for start of a new advance. The ongoing recovery in home prices shores up Americans' household wealth and should provide more homeowners the incentive to sell. The number of homes for sale is low, partly because many families have little equity in their homes and would benefit little from a sale. Rising home values help counter that trend.
But most economists are quick to point out that these recoveries are in real dollar terms, not adjusted for inflation. When that adjustment is made, prices still remain about 20% below their peak, so in inflation-adjusted terms, the market is still only back to 80% of its July 2006 high. Having said that, the recovery in prices is promising, even after adjusting for inflation. With improvements in most markets, housing should be in for a multi-year stretch of growth, which is good news for concrete producers.