The Coming Deceleration in House Price Growth

Still, the August Case-Shiller National Index will be up about 20% YoY

Yesterday, the National Association of Realtors® (NAR) reported that median house prices were up 13.3% year-over-year (YoY) in September. This is down from the peak growth rate of 23.6% YoY in May 2021.

Last month, Case-Shiller reported that the National Index was up 19.7% YoY in July (record YoY increase for Case-Shiller). The Case-Shiller index for August will be released this coming Tuesday, October 26th and will likely show prices up about 20% YoY (similar to July).

The Difference Between the Measures

The median prices reported by the NAR are for the most recent month only, so the prices are very timely. However, the prices can be distorted by the mix of homes sold.

Case-Shiller is a repeat sales index (they compare the current price of home to the previous sales price), and it a three month average. So the most recent report (for July), was actually for homes sold in May, June and July. From S&P S&P CoreLogic Case-Shiller Home Price Indices Methodology (PDF)

The indices are calculated monthly, using a three-month moving average algorithm. Home sales pairs are accumulated in rolling three-month periods, on which the repeat sales methodology is applied. The index point for each reporting month is based on sales pairs found for that month and the preceding two months. For example, the December 2005 index point is based on repeat sales data for October, November and December of 2005. …

To calculate the indices, data are collected on transactions of all residential properties during the months in question. The main variable used for index calculation is the price change between two arms-length sales of the same single-family home. Home price data are gathered after that information becomes publicly available at local recording offices across the country.

Not only is Case-Shiller released with a lag (the release next week will be for August, whereas the NAR release yesterday was for September), but the 3 month average means the August release will include sales in June and July too.

Median Prices Might Provide a Hint on Repeat Sales Prices

Although median prices can be distorted by the mix, and repeat sales indexes (like Case-Shiller and the FHFA) are more accurate measures of house prices, the median price index might provide earlier hints on the direction of prices.

This graph - as of the NAR release in October 2020 (a year ago) - shows median prices started to take off, even though the most recent Case-Shiller report only showed a very modest pickup in prices.

The second graph - as of the NAR release yesterday - shows that Case-Shiller followed the median prices up, and that median prices are now falling.

This suggests that Case-Shiller will start to show some deceleration in the September or October reports (to be released in late November and December).

Altos Research is seeing a similar deceleration in house prices. This from Mike Simonsen, CEO of Altos Research (here is the link to his video).

The bottom line is the Case-Shiller and FHFA repeat sales indexes will probably show a deceleration in house price growth in the coming months (but not in the report this coming Tuesday).