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Posts tagged with: "CSUSHPISA"

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A house divided against itself cannot stand

Explaining the composition effect in housing prices

Our recent post on women in the workforce included a lyric from Dolly Parton and an explanation of the composition effect. Here’s the formal definition: “The part of the observed between-group difference in the distribution of some economic outcome that can be explained by differences in the distribution of covariates.”

That’s a doozy of a definition, so let’s use a picture that’s worth 1,000 words to explain it… The graph shows the year-to-year growth rate of average home prices in the United States (blue bars) and in its 20 largest metropolitan areas (red bars). The blue bars and red bars generally extend in the same direction, although by different magnitudes. Because these top 20 metropolitan areas are part of the United States, it’s not surprising both sets of average prices move in the same direction.

But look what happened in 2010: Average home prices overall decreased while average home prices in the 20 largest metropolitan areas increased. Why? Because average home prices in smaller metropolitan areas and rural areas decreased more than average home prices in large metropolitan areas increased. That’s the composition effect: Looking at the big picture sometimes masks what’s going on with the individual parts.

Want to learn more about the composition effect in housing prices? Read “A Guide to Aggregate House Price Measures” by Jordan Rappaport of the Kansas City Fed.

How this graph was created: Search for “S&P home prices” and select the “U.S. National” series (FRED series ID CSUSHPISA). From the “Edit Graph” panel, use the “Add Line” feature to search for and select the “S&P 20-City” series (FRED series ID SPCS20RSA). From the “Format” tab, select “Bar” for graph type. From the “Edit Bar 1” tab, select “Percent Change from Year Ago” for units and “Annual” under “Modify frequency.” Do the same from the “Edit Bar 2” tab. Adjust the time period shown with the slider beneath the graph or with the start and end date boxes above the graph.

Suggested by Diego Mendez-Carbajo.

View on FRED, series used in this post: CSUSHPISA, SPCS20RSA

Housing recoveries without homeowners: National trends

Historically, the cost of buying a house has been positively correlated with the percent of households that own their home. During 1996 to 2006 in the United States, both the price of houses and the homeownership rate increased. This increasing trend ended abruptly with the global financial crisis, which saw house prices plunge and drove homeownership rates to historically low levels. If homeownership became less attractive in the wake of the financial crisis, we might expect both prices and homeownership to decrease. Similarly, if the current increase in house prices were driven by people buying homes to live in, we might expect the homeownership rate to increase along with prices. However, recent evidence shows that house prices and homeownership are diverging.

The graph shows that, in the wake of the financial crisis, house prices declined by over 25 percent, from an index value of around 180 to around 135. The homeownership rate also dropped from a high of over 69 percent to just over 63 percent, its lowest level since 1980. Unlike in the past, the homeownership rate continued to fall even after house prices began to recover.

Several factors could be driving the decoupling of house prices and the homeownership rate. From the housing supply side, there is a trend toward decreased construction of starter and mid-size housing units. Developers have increased the construction of large single-family homes at the expense of other segments in the market. This limited supply, particularly for starter homes, could result in increased prices for those homes and fewer new homeowners.

There are also several factors affecting housing demand. The wave of foreclosures during the recession may have made people more wary about homeownership. Tighter credit conditions may have reduced access to mortgage credit, placing homeownership out of reach for many households. Real estate investors may be buying properties to generate rental income, simultaneously bidding up the prices of homes while also decreasing the supply of homes available to potential homeowners.

All of the above explanations likely contribute somewhat to the divergence of house prices and homeownership. However, any explanation must consider that this trend isn’t just limited to the United States. In recent years, house prices and homeownership have diverged in the United Kingdom, Canada, Germany, Spain, and the euro area.

Homeownership is part of the “American Dream” and a key tool for households to build wealth. In the years since the recession, though, fewer Americans have bought homes and increasing house prices have made homeownership less attainable. What this means for the economy in the long term is unclear.

How this graph was created: From the FRED homepage, select “Browse data by…Category.” Then select “Housing” under “Production & Business Activity.” Find and select the quarterly seasonally adjusted “Homeownership Rate for the United States” series from the results. From the “Edit Graph” menu, select “Add Line” and search for “house price index.” Select the seasonally adjusted “S&P/Case-Shiller U.S. National Home Price Index” series from the results and click “Add data series.” Finally, in the “Format” tab, select “Right” for the y-axis position of Line 2.

Suggested by Daniel Eubanks, Pedro Gete, and Carlos Garriga.

View on FRED, series used in this post: CSUSHPISA, RSAHORUSQ156S

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