America’s healthily idiosyncratic housing market

May 28, 2013

This is the chart of US Case-Shiller prices. You can click to enlarge it, but sometimes it helps to take a step back: The thicker blue line is a composite of 10 cities, the red line is a composite of 20 cities, and the medium-weight green line, for you locals, is New York City.

This isn’t the chart you’re possibly familiar with, the one showing the sharp spike upwards in the past few months. That chart measures year-on-year gains; this one shows absolute levels, with January 2000 arbitrarily set as the 100 point.

The messages from this chart are different from the ebullient headlines you might be seeing elsewhere. The first message is that house prices aren’t suddenly soaring again: we had a big bubble from about mid-1997 to mid-2006, whe then had a big crash from mid-2006 to mid-2009, and since then we’ve basically just been wiggling sideways: nationwide house prices now are basically back to where they were at the beginning of 2009.

The second message is that there are massive regional variations, as you’d expect in a country the size of the USA. After setting every city equal to 100 in January 2000, the range today is enormous: it goes from 81, in Detroit, to 190, in Washington. And for all the bidding-war anecdotes in chattering-class circles about houses selling in one day for way above the asking price, there’s not much sign of frothiness here: indeed, New York prices actually fell in March.

All of this is good news. The last thing we need is another housing bubble, or any hint that we’re moving back towards a world where housing costs comprise a disproportionate part of the typical family’s monthly budget. Affordable housing is good for everybody, and if you see housing costs spiraling out of reach, that’s bad for the economy; it’s not amazing good news. Yes, it might be a consequence of a healthy economy — although it might equally just be a consequence of new home construction failing to keep up with demand. But it’s not in any way a leading indicator when it comes to broad-based growth; quite the opposite.

We’re also seeing a healthy degree of divergence between cities — and, as those chattering classes will tell you, between neighborhoods within cities, as well. “Property” is not some all-encompassing asset class; different houses in different cities are going to be worth different amounts, and their value is going to fluctuate in different ways. When all house prices start behaving the same way, and correlations start tending towards 1, that’s a good sign you’re either in a bubble or a bust.

The Case-Shiller index, by its nature, attempts to boil down the richly varied set of American housing markets, both between and within cities, to a single number. At one point, Robert Shiller even tried to sell derivatives based on the index, by which homeowners could try to hedge the value of their property, and non-homeowners could try to hedge the risk that prices would move out of reach. They never took off, for various good reasons.

In a reasonably healthy market, property prices tend towards the idiosyncratic — at the level of the individual property, at the neighborhood level, and at the municipal level. Looking at the Case-Shiller numbers, I’d say that today’s market is healthily idiosyncratic, and that even the city-by-city data hides an enormous amount of neighborh0od-level variation. So don’t generalize from today’s numbers — but do feel heartened by them, all the same.


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