The "Other 2/3" Of The Housing Bubble

Some of the common representations of the housing bubble have been concentrated on major metropolitan markets. 

One of the most widely followed housing market price indicators is provided by S&P Case-Shiller indexes.  These represent 10 and 20 metro markets. 

It has been argued that some parts of the country have not seen a housing bubble and that the national picture is being distorted when one looks only at measurements covering only large metropolitan areas.

There is also a national home price index provided by the FHFA.  The FHFA prices have shown less of a bubble than the Case-Shiller numbers, as shown in the following graph from the St. Louis Fed:

housing graph

Photo: Global Economic Intersection

At first glance it may appear that as the geographic base widens the bubble may be becoming negligible.  Such a conclusion would be misleading.

The population of the Case-Shiller Composite-20 metro areas is just over 104 million.  If we recognise that to be approximately 1/3 of the population of the entire country we can use the following equation to come to an interesting relationship:

0.33 x [CS-20] + 0.67 x [“Other 2/3”]  =  Home Price Index for the Entire Country ~  FHFA Index

Which rearranges to:

Home Price Index for the “Other 2/3”  =  (1/2) x { [3 x FHFA]  –  [CS-20]}

The results are included in the following graph:

housing graph

Photo: Global Economic Intersection

Outside of the Case-Shiller 20 large metropolitan areas there has also been a bubble.  It has simply developed to a different time line and peaked at a later time.  It is clear that, relative to January 2000, the “other 2/3” bubbled more slowly than the 1/3 represented by CS-20.  But, curiously, they did eventually reach a relative price level at their early 2009 peak that was higher than the CS-20 relative prices at the same time.  And the “other 2/3” still remain overvalued relative to the CS-20.

Caveat:  A reader has pointed out, that although the FHFA represents all states, it does not represent all mortgages.  They are largely conforming mortgages and do not include jumbos.  Another reader has submitted that FHFA does not include FHA and VA mortgages, which have larger numbers in the lower end of the conforming group.  I have not independently verified either representation.  So the treatment here should be considered as an approximation rather than an exactly controlled measurement. 

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at