By any measure, the death spiral in house price is over and the recovery is now setting in motion powerful forces of growth across the economy. The S&P Case Shiller House Price Index was up 1.4% in March â€“ the most recent data available â€“ and 10.9% from a year ago, the strongest pace in years. While other indexes are still in the single digits, all are well off the bottom and solidly trending up. The recovery has been so robust that some analysts are already calling a new bubble. Thatâ€™s a bit premature. The house price recovery only has one year under its belt, and we think it is just getting started.
Nationally, house prices peaked in 2006, plunged sharply through 2009, drifted sideways to down through 2011, and really only began to recovery in early 2012. Altogether, house prices declined 35.1% from peak to trough. Since the bottom, prices are up an impressive 10.9% (the dark orange bar in the chart) but are only about a fifth of the way to the prior peak (the light orange bar), well removed from bubble territory.
Regionally, San Francisco has posted the strongest recovery from the trough (the dark blue bar at the top) but is only about a third of the way to the prior peak. A few cities had less of a boom/bust, such as Denver and Dallas, and could post new all-time highs before the year is out. Other cities like Las Vegas are up smartly from the trough but are in such deep holes that they might not see new highs until a future business cycle altogether.
In the meantime, homeowners across the country are seeing higher house prices and feeling wealthier, more and more underwater mortgages are getting back above water, and mortgage assets that banks and others wrote down during the bust are now being written back up. It surely is no happenstance that the two sectors with the most exposure to the housing recovery â€“ Consumer Discretionary and Financials â€“ have been consistent leaders in the equity market since house prices turned up decisively a year ago â€¦ and they are still leading. The house price recovery is well underway but the positive feedback effects on the economy are just getting started.
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Warren Hatch, PhD, CFA
Chief Investment Strategist
McAlinden Research - a division of Catalpa Capital Advisors, LLC