Tuesday, December 30, 2008

The Case-Shiller index, most recent update

This shows the Case-Shiller indices for several cities. The black line shows the Ten City composite. The other color coded lines show the index for some of our major cities.

These Case-Shiller indices are nominal. That is, they are not corrected for inflation. They are all normalized to 100 at January 2000. Thus the Case-Shiller indices do not show house prices per se but rather house price appreciation relative to this fiducial date.

One can see for example, that the average house in Miami appreciated by a factor of 2.8 from Jan 2000 to its peak at January 2007. That is a total house price appreciation of 180% or 15% per year for 7 years. Quite astounding!

Please feel free to borrow these figures. Just be sure to reference the website.

The Case-Shiller index, inflation corrected

One might want to consider correcting the Case-Shiller (CS) indices for different measures of "inflation". There are of course many different measures of inflation: consumer price inflation, commodity inflation, asset inflation and wage inflation. The plot above is the CS corrected for the most common measure of consumer price inflation, CPI-U. It might be argued that over the long run, house prices should be fairly stable in "real" inflation adjusted dollars. This would imply that the prices above should revert to the average real value at the end of this cycle and so this provides some predictive value. Similarly, it could be argued that a better way of correcting the CS, would be to use wage inflation. It is after all, wages that are used to service mortgages. If wages do not increase, it is hard to see how people can pay for more expensive housing costs. Basically, real median household wages have been flat to slightly down since 1999. They are about 10% higher now than 1986.

Another argument can be made that rent prices are the right thing to compare house prices to. People either need to buy or rent and so the supply and demand for each as well as the supply of people should determine house prices. We will consider these alternative "inflation" measures in future posts.