The guessing game to predict when home prices might begin a sustained rise is heating up. Recent press reports including comments on foreclosures side by side with reports of bidding wars in some neighborhoods. A look at some of the S&P/Case-Shiller data shows some of the developments below the surface as the housing markets creep towards normal following the financial crisis and boom-bust. The chart below compares homes in one city, San Francisco, in different price ranges. The three indices cover homes in the most expensive third of the market, the middle third and the least expensive third. The price breakpoints shown on the chart are based on current prices. The red line tracks the index for the least expensive homes. This segment had the largest gain in the boom and the biggest fall in the bust. At the other extreme were the most expensive homes which rose, and fell, far less. Sub-prime and other less traditional mortgages were more widely used in lower priced homes, driving the market up and then down. The chart also shows that all three indices tracked one-another closely until the boom began in the early 2000s. In the last two years, after prices collapsed, the three indices are moving together again. This shift where homes at different prices levels show similar patterns is one sign that the market is slowly returning to normal. While the San Francisco indices have more dramatic differences than some other cities, this pattern is seen in the cities with the largest gains and losses over the last 12 years.
Price changes across the 20 S&P/Case-Shiller cities vary both by how high prices rose and how far they fell. The second chart compares the 20 cities in terms of both the rise (the horizontal axis) and the subsequent fall (the vertical axis). The dashed lines show equal annual increases in prices; the outer most green line represents a 4% annual gain across the whole time frame, the red dotted line represents no net change in price. The chart shows some interesting patterns. New York, Washington and Los Angeles are three cities farthest to the right upper corner, the sweet spot of large gains and minimal declines. These not only fared best but are largely “global” cities where prices are driven as much by global economics and foreign buyers as by local conditions. In the other direction, Detroit, Atlanta and Cleveland show some of the smallest gains and substantial declines. The Sunbelt cities — Las Vegas, Phoenix, Tampa, Miami and possibly San Diego — are cluster in the lower right with large price gains followed by large declines. Most of the cities fall on a diagonal from the upper left to the lower right with small next gains over the last 12 years. The chart design is due to Joseph L. Pagliari of the University of Chicago.