by Calculated Risk on 6/28/2011 11:13:00 AM

First a comment on the Case-Shiller seasonal adjustment: A few years ago, several people (including me), noticed that the seasonal adjustments weres getting pretty "wild". This was because of all the distressed sales - distressed sales are distributed throughout the year (with no seasonal pattern), and non-distressed sales were still following the usual pattern. So there was a very large percentage of distressed sales in the winter, and this led to huge swings in the seasonal adjustment.

In response, S&P started reporting on the Not Seasonally Adjusted (NSA) data. This is OK, but it can be a little confusing. Seasonally prices usually increase in April from March - so some of the increase this morning was due to seasonal factors. In fact the Seasonally Adjusted (SA) Case-Shiller composite 20 index was at a new post-bubble low. Note: April is still a seasonally weak month (the NSA index is below the SA index), but not as weak as March.

Just on a seasonal basis, the NSA index should increase through September. Starting in June, the NSA index will be above the SA index. A little confusing.

Case-Shiller, CoreLogic and others report nominal house prices. However it is also useful to look at house prices in real terms (adjusted for inflation), as a price-to-rent ratio, and also price-to-income (not shown here).

Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices are back to 1999/2000 levels, and the price-to-rent ratio is also back to 1999/2000 levels.

Nominal House Prices

Click on graph for larger image in graph gallery.

The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2011), and the monthly Case-Shiller Composite 20 SA (through April) and CoreLogic House Price Indexes (through April) in nominal terms (as reported).

In nominal terms, the Case-Shiller National index is back to Q3 2002 levels, the Case-Shiller Composite 20 Index (SA) is back to June 2003 levels, and the CoreLogic index is back to January 2003.

Real House Prices

The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q4 1999 levels, the Composite 20 index is back to September 2000, and the CoreLogic index back to January 2000.

A few key points:
• In real terms, all appreciation in the last decade is gone.

• Real prices are probably still too high. This isn't like in 2005 when prices were way out of the normal range. In many areas - with an increasing population and land constraints - there is an upward slope to real prices (see: The upward slope of Real House Prices)

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph using the Case-Shiller Composite 20 and CoreLogic House Price Index (through March).

This graph shows the price to rent ratio (January 1998 = 1.0).

Note: the measure of Owners' Equivalent Rent (OER) was mostly flat for two years - so the price-to-rent ratio mostly followed changes in nominal house prices. In recent months, OER has been increasing - lowering the price-to-rent ratio.

On a price-to-rent basis, the Composite 20 index is back to October 2000 levels, and the CoreLogic index is back to February 2000.

Earlier ...
• Case Shiller: Home Prices increase in April