Case-Shiller housing price index and city price betas - Each city has a different risk profile

 

The Case-Shiller housing price indices are closely followed by investors to obtain a good estimate of home price appreciation. The home price data are much richer and more detailed than just an index on a national level. Home prices can be analyzed for 20 different cities and on a national level. This is where the information gets interesting. Although there is a common element, the price appreciation for each city is different. The Las Vegas market is not the same as Detroit. A buyer of a home in San Francisco will see a different level of appreciation from a home in Boston. Hence, each city has a different return potential and risk. 

If the Fed starts to raise interest rates, it will impact home prices, but the effect will differ by city market. Some markets re more overvalued. Other markets are more stable.  A simple way to compress this information is to measure a city price index beta versus the national market. We have looked at the 20 cities available and have found there are significant city beta differences around the country. A shock to interest rates.

Using data from 2000 to the present, we have calculated the betas for 20 city markets. The West Coast cities have higher housing betas versus the Midwest. Newer cities that have seen strong demographic growth and thus have higher betas than those cities that are losing population.  

The impact of a tightening in the housing market will have a differential impact around the country. The risk of a price downturn will be greater in these high beta cities. It is worth considering the impact on region and cities from Fed policy.