Last week’s release of the Case-Shiller home price data for January showed that once again, prices for cheaper homes rose while those of more expensive homes stagnated.
I wanted to focus a bit more on this disparity by charting the home price tiers over multiple timeframes. This first chart shows how much the tiers have rebounded since their respective troughs in early 2009:
The graph suggests that the early-2009 rise in the high-priced tier was just a typical “spring bounce” after which prices started to drift mildly downward again. The price increase in the low tier was something quite a bit more, however, with that tier rising in a more or less straight line even through the typically weak fall and winter seasons. The middle tier, consisting as it does of some homes that are on the cheap side of the middle and some homes on the expensive side, unsurprisingly split the difference.
Here is the more familiar graph showing what happens if we widen the timeframe to go back to the peak of the market in the 2005-2006 period:
Here we see that despite the much stronger rebound, low-priced homes are still quite a bit further from the peak than their higher-priced counterparts. This second chart might lead one to believe that the rapid price increase in the low tier is owed to the fact that since prices there fell so much harder, low-priced houses are much cheaper compared to their instrinic values.
However, a chart going back to the beginning of the decade shows that this is not the case:
The boom (to put it mildly) in subprime lending during the late, great bubble caused low-tier home prices to rise substantially more than high tier prices. The steeper post-boom crash in the low tier served to bring prices in the three tiers back closer to the relationship that prevailed before the era of reckless mortgage finance caused such huge distortions.
So the marked disparity between price behavior in the low and high tiers is due to something else entirely. That something else is in all likelihood the massive government effort to prop up home prices.
Much of the government intervention in the housing market, notably low-down payment FHA loans, government guaranteed conforming loans, and the first-time buyer tax credit, has had an inordinate impact on entry-level homes. The price tier that contains these homes is going gangbusters as a result. Meanwhile, the high-priced tier, which doesn’t benefit from as much stimulus as the low tier, stagnates.
This divergence helps to illustrates that the housing rebound really is being driven by government stimulus rather than economic fundamentals. But I suppose readers of this blog will find that conclusion unsurprising.
— RICH TOSCANO