House Prices

The quarterly estimate of housing prices around the country was released this morning by OFHEO. From their press release:

WASHINGTON, D.C. – Average U.S. home prices increased 12.02 percent year over year from the third quarter of 2004 through the third quarter of 2005. This represents a two percentage point decline from the previous four-quarter appreciation rate of approximately 14 percent. Appreciation for the most recent quarter was 2.86 percent. The figures were released today by OFHEO Acting Director Stephen A. Blumenthal, as part of the House Price Index (HPI), a quarterly report analyzing housing price appreciation trends.

“Appreciation rates in the third quarter were extremely strong, although some deceleration can be seen in a number of the faster-appreciating markets,” said OFHEO Chief Economist Patrick Lawler. “Price momentum in the Pacific and New England states, in particular, has pulled back.”

As I’ve written before, I think it’s fairly meaningless to talk about national house prices, as housing markets are quintessentially local. Looking at individual markets, it seems that prices in some continued to boom. But those markets that were the first to experience the surge in housing prices are now clearly indicating that they’ve reached the end of the boom. The chart below illustrates.

Markets that began the big run-up in prices a bit later, like Miami, Phoenix, and Seattle, are not yet showing signs that their appreciations are ending… but presumably they will within a couple more quarters.

The big question will not be answered for a while yet, however: how far will the lines in the chart above fall? Will they stabilize at 5-10%? Will they go to zero? Or will house price changes follow the pattern of previous price surges, and actually turn negative? The following chart shows what happened in these same ‘hot’ markets the last time that there was a major price appreciation, in the late 1980s.

(Note: price changes are in nominal terms.)

To see how far the appreciation rates will fall we will of course have to wait another year or two. But I have heard no convincing argument to suggest why the end of the house price surge this time will be any different from the last time around.