Case-Shiller Home Prices Rise in May, But Don't Read Too Much into This

The May report(.pdf) for the S&P Case-Shiller Home Price Indexes showed the first monthly increase in three years, however, prospective home buyers and sellers should heed whatever few warnings they might hear today about reading too much into monthly data, especially around this time of the year.
"One month does not a trend change make" and this reality is quite easy to see in the chart above where there were many monthly price decreases prior to all 20 cities putting in their price peaks between 2005 and 2007.

For example, after a long string of monthly gains, Portland reported its first monthly price decrease in October of 2006 but didn't reach a peak until the following May - look for a similar occurrence as the beginning of a home price bottom starts to take shape.

From April to May, the 20-city index rose 0.5 percent while the 10-city index rose 0.4 percent, however, you can see in the chart below that there is a strong seasonal component to the data, monthly price changes improving around this time of the year regularly - look for more of the same in next month's report.
Conversely, price declines have their strongest seasonal influence during the winter, so, it will probably take another six or eight months to see another complete cycle for this pattern.

As shown below, both Los Angeles and San Diego have fallen out of the group of cities with annual price declines of 20 percent or more (indicated in blue) while Phoenix and Las Vegas improved only marginally, both maintaining 30+ percent declines as indicated in red.
David M. Blitzer, Chairman of the Index Committee at Standard & Poor's notes:

The pace of descent in home price values appears to be slowing. There is a clear inflection point in the year-over-year data, due to four consecutive months of improved rates of return, after the steep decline that began in the fall of 2005. In addition to the 10-City and 20-City Composites, 17 of the 20 metro areas also saw improvement in their annual returns compared to those of April. Looking at the monthly data, 13 of the 20 metro areas reported positive returns; and the 10-City and 20-City Composites reported positive returns for the first time since the summer of 2006.

To put it in perspective, these are the first time we have seen broad increases in home prices in 34 months. This could be an indication that home price declines are finally stabilizing. While many indicators are showing signs of life in the U.S. housing market, we should remember that on a year-over-year basis home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation.

The next few months of data should be pretty interesting, but, given the seasonal patterns in the second chart above, don't be surprised if home prices disappoint again later this year.

Comments

[Tim Plaehn:]

The Case Shiller data is for May and California had significant price improvement in June also. It will be interesting to see next month's numbers from C-S.

Jul 29 10:01 AM

[Cold Reality:]

A good article as usual, with great graphics to show the prices headed inexorably back toward the trendline. In a month or two, this miniscule seasonal bump will look just like all the other miniscule deviations on this chart, with the continued trend downwards, and possibly a few sharp drops as the looming defaults and foreclosures continue to re-price the market.

Jul 29 12:07 PM

[Mad Hedge F...:]

People are using a magnifying glass to find a green shootA handful of positive data on residential real estate, and all of a sudden everyone is jubilant that the crisis is over. June new home sales popped by 11%, while the S&P Case Shiller Price Index flaunted two back to back monthly gains. Never mind that these are the same people that have been calling a bottom almost every day for the past two years, and who themselves have gone broke in the process. It’s a basic law of economics that when you drop the price, the volume goes up. We have not paid enough penance yet. We have not atoned for a generation of under saving and overconsumption. The harsh reality is that the torrent of selling is being briefly staunched by a dwindling group of first time buyers once priced out of the market, who saved their cash, and stayed away from the stock market, and are now buying two thirds off the top. Take away the fantastically generous government subsidies that expire in a few months, throw in the next wave of Option ARM reset induced foreclosures, and this market folds like a wet taco shell. I’m waiting to buy at 20th century prices, and make that a home with an indoor swimming pool and basketball court..

Jul 29 12:24 PM

[moorer1:]

"One month does not a trend change make" and this reality is quite easy to see in the chart above where there were many monthly price decreases prior to all 20 cities putting in their price peaks between 2005 and 2007."

True...but I don't know if it's quite proper to compare the 20-city index with the individual city's index in this regard. And, in fact, in the run-up since Jan 2000, the _20-city index_ fell only one month during those 101 months.

Indeed, the seasonality has to be filtered out in order to understand the trend.

One clue as to where we're headed could be looking at the typical seasonal inflection points of summer and winter. If one examines the monthly change chart (the 1st derivative of the price curve) of the 20-city index, one can see that this curve had been making lower lows then lower highs since the winter of 2004(!). However, this trend has been broken this summer, i.e. the maximum monthly change for the summer of 2009 exceeds that of the summer of 2008. I think this does suggest that prices are, at least, trying to bottom.

Jul 29 06:31 PM

[pitchingpen...:]

Re:Chart # 1

Very nice, but what chance in hell does a color blind guy have?

Jul 29 09:34 PM

[Kint:]

That chart is hard to read.. the only easy city to see is New York. How about a chart where if you mouse over the city, the line comes to the forefront?

Jul 30 03:26 PM