The coverage of the release of the June Case-Shiller housing prices indices overlooked two important items in the data. First, an examination of the tiered indices (these show separately the movement of house prices in each city for cheapest third of houses, the middle third, and upper third) indicates a sharp divergence within many markets. In several of the former bubble markets higher end home prices appear to be stabilizing, while prices for homes in the bottom tier continue to fall rapidly. For example, in Los Angeles prices in the bottom third of the market fell by 3.2 percent in June, while prices in the top third fell by just 0.2 percent. Over the last quarter, prices for homes in the bottom tier fell at a 12.2 percent annual rate, while prices in the top tier dropped at just a 0.8 percent rate. There’s a similar story in Miami, where prices in the bottom tier fell at a 14.5 percent annual rate over the last quarter, while prices in the top tier fell at just a 4.2 percent rate. Over the last year, prices in the bottom tier have fallen 31.6 percent, which is not much larger than the 25.3 percent decline in prices for houses in the top tier. There’s a similar story in Las Vegas, Phoenix, San Diego, and San Francisco. Ultimately, there must be some spillover in the sense that if the cheapest homes fall far enough, people looking to buy more high-end homes might instead opt for a cheaper one and then invest in major renovations. But the divergence that is showing up in the data at present is striking. The other important point to note in connection with house prices is that inflation has picked up so that house prices would be falling rapidly in real terms, even if nominal house prices were flat. Over the last quarter, the CPI, excluding the rental components, increased at 14.1 percent annual rate. The bubble can be deflated either by a fall in nominal house prices or through inflation. There are important distributional implications for which route the collapse follows (borrowers will be helped by inflation, while lenders will be hurt), but either route can restore house prices to their long-term trend level.
--Dean Baker
