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CoreLogic Chief Economist Perspective- August 2015

Drivers of Home-Price Growth

Frank Nothaft    |    Property Valuation, Videos

 

The CoreLogic National Home Price Index (HPI) grew 6.5 percent over the 12-month period through June 2015, but the price growth was not uniform across the country. Some cities, like Denver, Naples, FL and San Francisco, had double-digit appreciation, while others such as Baltimore, Boston and New Orleans had prices that were stagnant or declining. Why does home price growth vary so much across cities?

A local housing market reflects an interplay of demand and supply forces over time. And while it may be difficult to directly measure those forces, we can observe the end results: the number of home sales and the transaction prices.

Over the past year we have seen several factors that have stimulated housing demand. First, mortgage rates for 30-year fixed-rate loans remained at or below 4 percent for much of the past year. Second, household income was supported by the labor market adding three million jobs across the nation. Third, consumer confidence rose to the most optimistic level in eight years. These three factors worked to boost the number of households that are shopping to buy homes, that is, the demand side for buying homes.

Turning to the supply, or number of homes offered for sale, that inventory has remained relatively lean. To compare recent years with previous periods, Exhibit 1 measures the for-sale inventory relative to the size of the U.S. housing stock. Examining the period since the early 1980s, the last three years have been the longest stretch of lean for-sale inventory that has occurred in the U.S.

That’s not to say that the number of homes offered for sale is relatively low in every market. Looking across the U.S., some cities have an extraordinarily low for-sale inventory, measured in months’ supply at the recent sales pace. Exhibit 2 shows that the months’ supply was 5.9 months for the U.S. in the CoreLogic home-listing data during April 2015, but varied greatly across cities. In San Jose and Denver, there was only a 1-month supply of homes on the market, whereas Philadelphia had a 9-months’ supply and Providence a 10-months’ supply.

Cities with a low supply of homes on the market tend to experience relatively short days-on-market before sale and register faster home price growth, and conversely for cities with a large supply of homes for sale. For example, most sales in San Jose and Denver during this past April were homes that had been listed less than 10 days earlier, and the home price appreciation from April 2014 to April 2015 was 11 percent or better. Contrast that with Philadelphia and Providence, where most homes had been listed more than 100 days before selling, and where annual home price growth was only 1 percent.

Looking forward to the next 12 months, additional supply from new construction and higher prices for existing homes are expected to increase the for-sale inventory. In addition, mortgage rates may rise over the next year and dampen demand. Putting the demand and supply pieces together implies that the growth in the CoreLogic HPI will continue but at a slower pace than last year: CoreLogic is projecting a 4.5 percent rise over the coming year, a slowing from the 6.5 percent growth during the past year.

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