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The Case-Shiller Home Price Index, which I’ve routinely touted (sometimes in excruciating detail) as the best measure of aggregate home price changes, has just become even more useful. Whereas Professors Case and Shiller used to provide a single value that combined the price movement of all homes in San Diego county, they now offer three additional indexes that track changes in the prices of San Diego’s low-, medium-, and high-priced homes.

The new indexes still lump together homes from diverse geographies througout the county, so to the extent that markets with similar pricing but different locations are behaving differently, those differences will not be represented. But three categories are better than one, and segmenting homes in this manner can at least illuminate how changing mortgage standards have had an effect on different property types.

Let’s get to it. The first graph charts out the three home price tiers all the way back to 1989, when the dataset begins. The most notable point is that on a percentage basis, low-tier homes saw their prices rise far faster than either mid- or high-tier homes during the recent boom.

The outperformance of lower-priced homes can almost certainly be traced back to the explosion of subprime mortgage availability. Borrowing got easier for everyone during the real estate bubble, but the degree to which it got easier was much greater for for subprime than for prime borrowers.

The outcome can clearly be seen in the relative price gains in the lower home tier, where subprime mortgages were used most frequently. It also makes sense that mid-priced homes outperformed high-priced homes, because the changes in loan underwriting standards were least dramatic for the types of people that typically buy higher priced homes.

As the next graph indicates, this process has now gone into reverse. The low-tier home price index has fallen 13.3 percent from its June 2006 peak, while the high-tier index is down a comparitively mild 5.8 percent since its peak that same month. The middle tier, which experienced an earlier peak in November 2005, has declined 11.3 percent since that month.

Note that the data series is only current up to August 2007. Regular readers will recall that what I call round two of the credit crunch, in which lending abruptly tightened up for more creditworthy borrowers, took place right around then. If my theory about this second phase of mortgage tightening is correct, the green lines in the accompanying charts should start to head further south in the months ahead as high-tier home prices come under pressure. Time will tell.

One last observation: looking back at the long-term graph it’s interesting to note that while high-priced homes are holding up best during the current downturn, they actually fell hardest of all during the last housing bust. This further underscores the idea that the immediate cause of the last downturn was unemployment in high-paying job sectors whereas this time around easy mortgage financing (or lack thereof) is the prime mover.

Next week we’ll take a look at real home prices among the three categories by adjusting the new Case-Shiller indexes for Consumer Price Index inflation.

— RICH TOSCANO

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