Prices have continued to rise at a solid pace for most homes in the U.S. as evidenced by the CoreLogic national Home Price Index (HPITM) which shows that home prices rose more than 6 percent this year through September 2015. But national home price indexes mask important differences in various submarkets, obscuring trends by neighborhood or by value tier.
Home prices in local markets are not all identical, but are distributed around a central value. For example, the median home price is that value for which one-half of the homes are priced below and one-half are priced above. And we can further subdivide each half to compare the lowest-priced homes with those closer to, but still below, the median, with those just above the median, and with those that are much higher priced.
When we do so, several trends appear. First, all four price tiers have appreciated, on average, in the U.S. over the past year. Second, the amount of home price appreciation is greatest for the lowest priced homes and least for the highest priced homes. Third, this pattern occurs not just during the past year but also when we compare the price appreciation relative to the trough in home prices after the Great Recession.
These trends are shown in Exhibit 1: The highest-priced tier – those homes valued at more than 25 percent above their local-area median price – appreciated 3.9 percent in the year ending August 2015 and 30 percent from their post-Recession trough. In contrast, the lowest-priced tier – those homes valued at more than 25 percent below their local-area median – appreciated 9.3 percent during the past year and were up 51 percent from their post-recession trough.
Why has there been a different pace of price recovery by home-price tier? One reason is the difference in the supply of homes coming on the market for sale within each segment. Part of that supply comes from new construction. And while single-family construction remains at a relatively low pace of activity, the homes that are being built tend to be larger, have more amenities, and add new supply in the higher-priced segments of a local market.
Single-family homes completed during the first half of 2015 had an average floor area close to 2,700 square feet, the largest homes built since the Census Bureau began tracking new-home size more than 40 years ago. Homes completed this year were 11 percent bigger than those built ten years ago, and 28 percent bigger than those completed in 1995 (see Exhibit 2). The additional supply has helped to moderate price appreciation for the higher-priced tier in the market.
A second reason for the faster price growth within the lowest-price tier has been strong demand for these homes by investors supplementing the owner-occupant bid. Investors have generally acquired moderately priced homes rather than million-dollar homes, thereby adding to demand for the lower-priced segment. The combination of investors supplementing demand for lower-priced homes and new construction adding to supply for higher-priced homes has helped create the differential in appreciation by price tier.
The coming year will likely see a moderation in price appreciation in the national index as well as across price tiers. And we will likely also see slower appreciation among the more expensive segment and faster appreciation within the lowest-priced tier, as new construction will generally augment the supply of higher-priced homes. Overall, we expect the CoreLogic national Home Price Index to appreciate 5 percent during 2016.
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