Home Prices Rise But Are Still Below 2006 Peak

October 23, 2013 | Nat Kellogg, CFA, President

Our Chart of the Week looks at the S&P Case-Schiller 10-City Composite Index which is one of the best broad measures of housing prices in the U.S. This is a “drawdown” chart that looks at prices as a percentage of their prior peaks. When the lines on the chart are at 100%, prices are at a new all-time high. The chart clearly shows the modest drop in housing prices that resulted from the early 1990’s recession and the severe drop in prices following the 2008 credit crisis. Over the last 24 months, home prices have started increasing again as the economy improved, employment picked up, and interest rates remained low. Nonetheless, broadly speaking, housing prices remain significantly below their prior peak in 2006. A few interesting things to note:

•  The 10-City Composite Index fell 34% from a peak in April 2006 to a trough in January 2012. The index has subsequently increased 16% from those lows.
• Las Vegas had the largest drop falling 62% from peak to trough. However, housing prices in Las Vegas have jumped 34% from the bottom. Las Vegas still remains the most depressed housing market where, even after the recent advance, prices are only about half of what they were at the peak.
• Denver is the only major market that has returned to peak pricing levels. Boston has been the second most resilient market, where prices are only 10% below the prior peak.

The rebound in housing prices is providing a nice boost to U.S. GDP, employment, and the stock market. As housing prices rise, fewer homeowners are underwater on their mortgages (i.e., owing more on their mortgage than their home is worth) which improves consumer credit quality, leads to lower mortgage delinquencies, and gives homeowners more flexibility to refinance or sell their homes. All of these trends still appear to be in the early stages at this point. As long as interest rates stay low, we expect these trends to continue in the months ahead, providing a boost to the economy and the markets.