It’s Not Only Demand That’s Raising Home Prices

Home prices continued to rise three times faster than the rate of inflation, showing year over year increase in prices of 5 percent or more for 16 straight months, according to data from the S&P CoreLogic Case-Shiller Indices released by S&P Dow Jones on Tuesday. The indices indicated that home prices grew 6.2 percent in November, slightly up, from 6.1 percent growth shown in October 2017.

The S&P CoreLogic Case-Shiller Indices are constructed to accurately track the price path of typical single-family homes and consists of three parts—The S&P CoreLogic Case-Shiller U.S. National Home Price Index, The S&P CoreLogic Case-Shiller 10-City Composite Home Price Index, and The S&P CoreLogic Case-Shiller 20-City Composite Home Price Index.

“Given slow population and income growth since the financial crisis, demand is not the primary factor in rising home prices,” said David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Construction costs, as measured by National Income and Product Accounts, recovered after the financial crisis, increasing between 2 percent and 4 percent annually, but do not explain all of the home price gains.”

The indices showed that from 2010 to the latest month of data, the construction of single family homes slowed, with single family home starts averaging 632,000 annually. This is less than the annual rate during the 2007-2009 financial crisis of 698,000.

“[These numbers are] still lesser than the long-term average of slightly more than one million annually from 1959 to 2000 and 1.5 million during the 2001-2006 boom years. Without more supply, home prices may continue to substantially outpace inflation,” Blitzer said.

Reflecting the national trend, the 20-City index has also climbed at a pace of 5 percent for 28 months. Cities in Western U.S., particularly, Seattle, Las Vegas, and San Francisco reported the highest year-over-year gains among the 20 cities on the 20-City Index, as Seattle led the way with a 12.7 percent increase, followed by Las Vegas with a 10.6 percent increase, and San Francisco with a 9.1 percent increase.

“Looking across the 20 cities covered here, those that enjoyed the fastest price increases before the 2007-2009 financial crisis are again among those cities experiencing the largest gains. San Diego, Los Angeles, Miami, and Las Vegas, price leaders in the boom before the crisis, are again seeing strong price gains. They have been joined by three cities where prices were above average during the financial crisis and continue to rise rapidly – Dallas, Portland, and Seattle,” Blitzer said.