New Record Home Prices in Dallas, Denver

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Although imperfect, the S&P/Case-Shiller Home Price Index is fairly closely watched as a guide to housing prices across the U.S. For the past few months, the index has been rising, so it’s not entirely surprising that the numbers released today show yet another jump — of 1.0%, on a seasonally adjusted basis, reflecting May sales.

What is raising eyebrows, however, is that in two of the twenty cities tracked by the index, home prices hit new highs.

The numbers aren’t “the best we’ve seen post-Great Recession” or “the greatest recovery since the slump.” They are, in Denver and Dallas, new all-time highs. Denver’s seasonally adjusted gain of just 0.6% (monthly up from April) puts prices at a level that surpasses the previous peak of August 2006. Denver’s year-over-year change is 9.6%.

Similarly, Dallas, up 0.6% month-to-month and 7.6% year-over-year, is at price levels that beat the previous peak of June 2007.

Neither of these cities suffered the level of overbuilding — and subsequent crash — of a Phoenix or Miami. But those cities are recovering too, with Miami up 14.2% year-over-year, and Phoenix up 20.6%.

In fact, all twenty cities in the index posted gains. Five cities showed monthly jumps greater than three percent: San Francisco (4.3%), Chicago (3.7%), Atlanta (3.4%), and San Diego and Seattle (each 3.1%).

Clearly, the next challenge for the market should be how it responds to rising mortgage rates. The positive housing news above reflects sales in May and rates for 30-year-fixed loans are up more than a point since then, to 4.58%.

According to the Mortgage Bankers’ Association, which conducts a weekly survey of lenders, applications for new loans are indeed down, even on a seasonally adjusted basis.

However, Mark Palim, a vice president in the Economic and Strategic Research Group at Fannie Mae wrote in a research commentary that “the increase in mortgage rates to date … is not expected to be sufficient to choke off the housing and economic recovery.” Palim studied two historical periods, one in 1993-1994 when rates rose more than two percentage points, and one in 1998-2000, when rates rose by 1.8 percentage points.

In those instances, Palim noted, the rate of increase of home prices slowed or moved sideways, but did not change course entirely.

Of course today’s economy is not that of the nineties, or even the aughts, so market watchers will continue to hold their breath as new data come out. But for now, I think the betting pool will be on which cities will hit all-time highs next month.

I’ve got my chips on San Francisco (up 24.5% year-over-year). Homebuyers, are you in?