It is often said, and for most people true, that the biggest purchase you will ever make is your home. The residential property market is a key component of all major economies. In the USA, it is estimated that residential investment contributes 5% to GDP and housing services (anything from architects and real estate to removals companies and legal services) contributes a further 12% or so, giving the sector a contribution to GDP of about 18%. Consequently, data related to the housing sector is keenly watched.
Data just released for the July Case-Shiller Home Price Index shows that house prices saw a 12.4% increase in the year to the end of July. This is the biggest annual rise since February 2006, before the Global Financial Crisis. The data relates to single-family homes and is based on a survey of 20 US cities; rises were recorded in 13 of these cities. Seasonally adjusted data shows that prices increases by 0.6% in July compared to a 0.9% rise in June. This decline has been attributed to higher mortgage costs as lenders start to price in the “Taper”, the expected draw-down of Federal Reserve financial support through monthly asset purchases worth $85 billion which has helped to subdue mortgage costs.
Whilst the data looks encouraging, it is on a relative basis. To put matters in perspective, a report in The Economist, in June, expressed the house price over a much longer time span (1987-2013) and normalises it to the 1987 benchmark. In percentage terms, Las Vegas has seen the house price fall by 23.8% over this period whilst homes in New York cost 4.1% more than they did in 1987. A basket of 10 cities shows that prices more generally have risen by 22.9% since 1987. The ten city index has fallen back from an index high of 350 (meaning the price went up by 3.5 times) in 2006 to stand at a value of 255 this year, showing the real effect of the crisis on the value of US real estate.