A key market update for investors: The state of homeowner equity (Part 3 of 5)
The CoreLogic Index of real estate prices increased 11.8% year-over-year in November
The CoreLogic Index is a widely followed index of real estate values. Unlike the other major indices, such as Case-Shiller or Radar Logic, CoreLogic separates distressed sales from non-distressed sales. Non-distressed sales more indicate the core market in general. Note that CoreLogic recently bought the Case-Shiller indices, so we’ll see if that changes its methodology. Mortgage REITs like NewCastle (NCT) and PennyMac (PMT) as well as homebuilders like Lennar (LEN), PulteGroup (PHM), and D.R. Horton (DHI) pay close attention to real estate values.
The CoreLogic Home Price Index
Real estate values are big drivers of consumer confidence and spending, so they have an enormous effect on the economy. The phenomenon of “underwater” homeowners, or those who owe more than their mortgage is worth, has been a major drag on economic growth. Underwater homeowners are reluctant to spend and can’t relocate to where jobs are. Real estate and mortgage professionals watch the real estate indices closely.
Real estate prices are also a big driver of credit availability in the economy. Mortgages and loans secured by real estate are major risk areas for banks. When real estate prices are falling, banks become conservative and reserve funds for losses. Conversely, increasing real estate prices make the collateral worth more than the loan, which encourages them to lend more.
Month-over-month growth is decelerating, but still positive
The 12.7% year-over-year gain resembles the gains we saw during the bubble years. On a month-over-month basis, the increase was 0.9%—a good number. Both distressed sales and non-distressed sales rose by similar amounts. The consensus is growing that prices bottomed in February of last year. The rebound has been strongest in the western states—primarily California, Nevada, and Arizona. That said, of the 100 distinct markets that CoreLogic measures, 96 showed year-over-year gains.
Browse this series on Market Realist:
- Part 1 - Increasing asset prices cause the household net worth to soar high
- Part 2 - Negative equity falls again as home price appreciation continues
- Part 4 - Why HAMP modifications continue to increase homeowner equity
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