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Why home price increases may not excite homebuilders like Lennar

Phalguni Soni

Why this might be 2014's most pivotal week for financial releases (Part 6 of 7)

(Continued from Part 5)

The S&P/Case-Shiller Home Price Index

The S&P/Case-Shiller Home Price Index (or HPI) for February will release on Tuesday, April 29.

What is the S&P/Case-Shiller Home Price Index?

The S&P/Case-Shiller Home Price Indices are designed to track price trends in typical single-family homes in specific metropolitan areas. The S&P/Case-Shiller Composite of 20 Home Price Index is a value-weighted average of the 20 metro area indices. The index has a base value of 100 in January 2000. An Index value of 120 would mean a 20% increase in prices since January 2000 for a typical home located in the subject market. A value of 80 would indicate a 20% price decline since January 2000.

Highlights from the January Case-Shiller Home Prices Index report

  • The HPI, although up 13.2% year-on-year, declined 0.1% on a month-on-month basis. The third consecutive monthly decline in the HPI suggested that the housing market was cooling in the 20 cities that the HPI covers.
  • Home prices declined in 12 out of the 20 cities, with Chicago prices falling the most (1.2%) and Las Vegas showing the highest increase (1.1%) on a month-on-month basis.

What to look for in February’s report

Home prices in the Sun Belt, notably Las Vegas, San Diego, San Francisco, Tampa, and Miami, have posted the largest appreciation in January. These are also some of the largest real estate markets, and their price trend in February’s report will provide investors valuable clues as to the direction of the overall housing market.

February and March have seen simultaneous gains in both the stock (IVV) and bond markets (BABS). This was on account of hot money flows from emerging markets (VWO) like India and Russia. The Fed’s decision to continue with tapering asset purchases as well as positive economic releases like the purchasing managers’ index and jobs reports in March also propelled the S&P Index higher. This exuberance could transfer to the housing market as well, and the Case-Shiller HPI report for February could show a moderate acceleration in home price increases.

Investor flows can be fickle

An increase in home prices would mean increased demand for housing and homebuilders like Lennar (LEN) and Toll Brothers (TOL) starting new housing construction to fill in the additional demand requirement. But housing demand that’s driven by speculative excess in some geographies (as suggested by Robert Shiller, co-founder of the HPI) is unlikely to have that impact, as investor flows can be volatile. Further, by the time fresh housing supply came to the market, the trend could have reversed again, with house prices falling instead of rising.

Continue to Part 7

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