Cheaper Homes Still Rebounding Fastest

The Case-Shiller home price index isn’t as timely as the monthly median price data, but it does have some advantages.

For one, it gives a more accurate read on actual home price changes because it compares repeat sales of the same homes. (More than you ever wanted to know on this topic can be found here). CS data also breaks down price changes for low-, mid- and high-priced homes.

So, we know that 2013’s price surge was most beneficial to lower-priced homes, which were up 22 percent for the year. Mid-priced homes were up 19 percent and the most expensive tier was up “only” 16 percent. The overall index was up 18 percent for the year. (The price tiers are calculated simply by separating the home sales into thirds: the high-priced tier is composed of the most expensive one-third of homes sold during the measurement period, and so on.)

This is the same pattern we’ve seen since the 2009 home price trough: from their respective lows through the end of 2013, the cheapest one-third of homes were up 51 percent, versus 30 percent for the middle tier, 23 percent for the expensive one and 34 percent for the overall index. Most of that price increase — and in the case of the middle and high tiers, all of it — has taken place since 2012.

This graph of the different tiers since the 2009 price low shows that the relative strength of the cheaper homes continued right through the end of the year:

Now, we get to some historical context. Cheaper homes have done a lot better in the rebound, but they also suffered far worse during the crash. Here’s what happens when we start the graph at the bubble peak:

When looking at longer-term price histories, it’s instructive to adjust for inflation, so that we can see how much of the price change has been due to actual changes in supply and demand, versus how much is simply due to money becoming less valuable over time. That is seen in the following two graphs, which are the same as the above two, but adjust for inflation. With the exception of the low-priced index, the bottom for inflation-adjusted prices was not actually in 2009, but in early 2012.

Finally, here is a graph going as far back as the data allows (also inflation-adjusted):

This provides yet more context for those low-priced homes: Their poor showing in the bust was the result of a far larger surge during the bubble, thanks largely to the preponderance of subprime mortgages — most of which eventually went bad after the price appreciation perpetual motion machine ground to a halt.

This time around, the strength in lower-priced homes is purportedly due to heavy investor demand. This would seem to be an inherently self-limiting factor, as investor demand should drop as prices rise (though we’ve certainly seen the opposite happen before). Regardless, for now, lower-priced homes still seem to be bouncing a lot harder than the more expensive stuff.