The Morning Report
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In reaction to the latest Case-Shiller home price graphs, a few readers have asked how a property worth not much more than $400,000 can be considered a member of the “high-priced tier.”
The answer is that there is no considering about it. Each month, the Case-Shiller price tiers are calculated by separating all sold homes into thirds by price. The high-priced tier represents not someone’s subjective idea of what comprises a high-priced San Diego home, but rather the most expensive one-third of homes sold during the measurement period.
For January’s Case-Shiller index, the cutoff between the top one-third and the middle one-third was $419,143. The cutoff between the middle one-third and lowest-priced one-third of homes sold was about $284,375.
The tier cutoffs, and especially the one between the high- and mid-priced tiers, used to be a lot higher. Some of the decrease in the cutoffs is a result of home price declines, as you’d expect. If home prices fell a certain amount, we’d expect the tier breakpoints to fall a similar amount, all things equal.
But the cutoffs have actually fallen faster than home prices themselves. Over the past year, the Case-Shiller index has measured home price declines of 20.9 percent for the high tier and 20.1 percent for the middle tier. But over the same period, the breakpoint between the high and middle tiers has declined by 33.4 percent, from $629,470 to $419,173.
The cause of this disparity lies in something we’ve been discussing for a while: the explosion in sales activity among lower-priced homes even as high-priced home sales remain fairly stagnant. We’ve already seen it by analyzing zip code-specific data. The dramatic slide in the Case-Shiller high tier price cutoff is yet another sign of the shift in buyer interest towards less expensive homes.
The limit between the low-priced and mid-priced tiers also fell more than actual prices, but not as dramatically. Over the past year, the low-tier cutoff has fallen by 32.4 percent while prices of low-tier homes have fallen by 29.3 percent.
When the tier cutoffs stop falling faster than home prices, that will be a sign that the distribution of buying activity is beginning to even out again. Until then, keep in mind that the Case-Shiller high tier doesn’t necessarily refer to expensive homes in swanky areas, but simply to the most expensive one-third of homes that happened to sell during the measurement period.
— RICH TOSCANO