The Potential For A Negative Wealth Effect

The Case-Shiller home price index was updated this morning and showed that home prices on a national level rose 3.72% compared to the same month last year, the twelfth consecutive deceleration in price growth.

National Home Price Index Year over Year Growth:Source: S&P, Dow Jones

Looking at the same national home price index chart shows that home price growth has moved significantly lower, a full 279 basis points from the recent peak in growth of 6.51%. 

National Home Price Index Year over Year Growth:Source: S&P, Dow Jones

A chart that I frequently post when looking at the home price index data series is the year over year change in the year over year growth rate. What we are looking for in this chart is to see if the rate of growth is accelerating or decelerating. 

The chart below takes the current year over year growth rate minus the year over year growth rate from one year ago.

That means if home prices were growing at 5.0% year over year in 2017 and 6.0% in 2018, the year over year change in the year over year growth rate would be +1%.

On a national level, the growth in home prices was increasing by roughly 0.9% per year at the end of 2017. Price growth is now negative compared to the growth rate one year ago and the pace of decline is worsening. 

The deceleration in home price growth continues to get more dramatic.

As the rate of change in home price growth started to fall at the end of 2017 and early 2018, it was clear it was time to get bearish on housing. I continue to expect the rate of change in home price growth to accelerate to the downside for the coming months.

I cannot start to get bullish on residential housing until the rate of change in home price growth starts to inflect higher (or gets less negative).

Year over Year Change in Year over Year Growth of Home Prices:Source: S&P, Dow Jones

After each Case-Shiller report, I update the values in the table below which shows the year over year growth rate in home prices by city and compares it to the growth rate one month ago, six months ago and one year ago.

The table indicates that only 17% of the cities are showing growth that is higher than last month and 0% of cities are showing growth that is higher than one year ago.

The table below is sorted by the 1-year rate of change. The cities at the top are not necessarily growing the fastest, but are accelerating at the fastest pace (or decelerating at the slowest pace). The order of this chart is very important as to the health of the respective market. In general, you want to be bullish of "accelerating" markets and be bearish of "decelerating" markets.

Home Price Index Table By City (Sorted By Rate Of Acceleration):Source: S&P, Dow Jones

The following table sorts the 20 cities by current increase in home prices. Las Vegas leads the country with home prices increasing 8.24% year over year but price growth is starting to cool. 

Home Price Index Table By City (Sorted By Year over Year Price Growth):Source: S&P, Dow Jones

The rate of decline in home price growth continues to worsen. In every major region, home price growth is slower today than the same time last year. In five regions, the rate of home price growth is not even keeping up with the rate of inflation. 

While there have been some monthly declines home prices, we have not yet seen any year over year declines in home prices. Should the rate of home price growth continue to worsen, we could start to see a negative wealth effect that adversely impacts consumption as the largest asset many people own starts to decline in value. 

It should be noted that the Case-Shiller home price data is two months delayed (the data is for the March reporting period) so this data series is not a leading economic indicator but it is an important gauge as it pertains to the health of the residential housing market in regards to price growth. 

Bonus Discussion:

The three steepest rate of change decelerations are all in the West. In one year, some regions in California have seen home price growth decelerate from 11% to 1%. 

In Seattle, home price growth has fallen from 13% to 1.64%. 

I welcome comments on the severe deceleration in home price growth centered on the West Coast.