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A Big Price Decline in November

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The November release of the Case-Shiller Home Price Index indicates that San Diego home prices fell at their fastest pace yet that month.

The low-price tier of the index (representing the least expensive third of the data sample) suffered worst of all, as usual, falling 4.8 percent from its October level. The medium-price tier fell 3.9 percent and the high-price tier held up best, also as usual, dropping 1.8 percent for the month.

From their respective high points (denoted in the graph below), the low-priced tier had dropped by 23.4 percent as of November, the medium-priced tier by 18.3 percent, and the high-priced tier by 10.3 percent.

The reason for the high-priced tier's comparative resilience becomes clear when looking at the long-term chart below. Higher-end homes just never rose as much in price, percentage-wise, as those in the lower tiers.

All three tiers are moving back to price levels that are better supported by the economic fundamentals. But the low-priced tier and to a lesser extent the middle-priced tier, having risen that much further from their fundamental underpinnings, have to decline a lot faster to even things out.

Now, just to entirely thwart all attempts to create a nice printable version of this article, here are the above two charts adjusted for Consumer Price Index (CPI) inflation:

Adjusting home prices by CPI inflation allows us to roughly compare how expensive houses are compared to everything else. The final graph should make clear that despite the declines to date, San Diego homes are still quite pricey on a historical basis.

Keep in mind that the HPI data graphed above is only current back to November. On top of that, the November figure includes home sales transacted in September and October as well. This is some serious lag -- here we are almost upon February and we are still looking at sales that closed in September. We put up with the lag, however, because the Case-Shiller HPI uses the most accurate methodology I am aware of to measure aggregate home price changes. The advantage is that HPI measures repeat sales of individual homes, as opposed to the median-based indicators that only measure how much was paid for the median-priced home with no regard for how nice a home it was. (I have gone into gruesome detail on this topic elsewhere, for those interested.)

Those who seek a more timely if less accurate indicator should check out my writeup on December resale prices. The overall size-adjusted median price dropped a whopping 5 percent between November and December. To the extent that this fall was caused by actual price declines, rather than a compositional shift toward lower price-per-square-foot homes, we can expect another dismal showing from the Case-Shiller HPI next month.

-- RICH TOSCANO