A nominal gain, a real loss

The S&P Cotality Case-Shiller national home price index rose 1.1 percent over the year in May, against 0.9 percent in April. The ten-city composite rose 2.4 percent and the twenty-city composite 1.6 percent. The release itself says what that means: with May inflation at 4.2 percent, home values fell in real terms for a twelfth consecutive month.[1]

A house is an asset that does not turn into cash for its owner until it is sold, yet debt is taken against it and spending decisions are made by looking at it. A household whose home appreciates 1.1 percent in nominal terms over a year while inflation runs at 4.2 percent sees a gain on paper and a loss in purchasing power. The reason that loss does not appear in the headline is that the index is published in nominal terms.[1]

The distribution under the average

The city figures in the release show that the national number describes nobody. Chicago is the strongest market at 6.9 percent year on year and Las Vegas the weakest at minus 1.9 percent, a gap of 8.8 percentage points. A household that owns in Chicago gained both nominally and in real terms, while one that owns in Las Vegas lost on both counts. The national 1.1 percent sits between them and describes neither.[1]

What matters is that this distribution runs by location rather than by household. Same income, same occupation, same debt burden, different city. The source of the difference is local supply and local demand conditions rather than household behaviour. A second explanation fits the same data: the gap between cities may arise from differences in new housing supply rather than in household circumstances, and the index alone cannot separate the two.[1]

The side that wants to buy

For an owner who does not want to sell, this loss stays on paper. For someone who wants to buy, the picture is different: the release says mortgage rates at 6.5 percent continue to weigh on affordability. A price falling in real terms does not lower the monthly payment; when the rate holds and the nominal price is close to flat, the cost of entry stays flat too.[1]

The consumer confidence data released the same day show how the same households assess their current position. The Present Situation Index from The Conference Board fell 3.6 points to 114.9, its third consecutive decline, and the headline index stood at 90.8. The labour differential narrowed 0.7 percentage points to 3.1 percent. The threshold to watch is clear: if annual inflation stays above the national index's annual gain through the August and September releases, the real decline will extend to a fourteenth month.[1], [2]