Surprise! Home prices rose more than expected in April, data out Tuesday showed.
The near 15% jump in the S&P CoreLogic Case-Shiller 20-City Index came in slightly ahead of an expected 14.7% increase. It was the largest gain since December of 2005 (figure below).
That was enough on its own to warrant a bombastic headline, but even more conducive to hyperbole was the 14.6% YoY gain on the national index, because that counted as the single largest advance in recorded history (the available data goes back to 1988).
On a MoM basis, the 20-city gauge rose 1.62%, while the national index increased 1.58%.
Needless to say, this will feed the housing bubble narrative, although you might point to more recent data which suggests affordability is beginning to chip away at what many analysts assumed was bulletproof demand.
“We have previously suggested that the strength in the US housing market is being driven in part by reaction to the COVID pandemic, as potential buyers move from urban apartments to suburban homes,” Craig Lazzara, global head of index investment strategy at S&P Dow Jones Indices, remarked, on the way to saying that April’s figures were “consistent with this hypothesis.”
It’s somewhat amusing that anyone would use the word “hypothesis” to describe the pandemic effect on the US housing market. It’s not a hypothesis. It’s an observable fact. Everything about the epidemic — from containment protocols reducing the appeal of urban living to the proliferation of work-from-home arrangements to the Fed’s role in perpetuating demand — was conducive to a historic surge in prices.
The figure (below) is updated with the latest data on both series — it’s funny, assuming you can find humor in these sorts of things.
“This demand surge may simply represent an acceleration of purchases that would have occurred anyway over the next several years,” S&P’s Lazzara mused, before gently suggesting that although the pull-forward thesis probably has merit, “there may have been a secular change in locational preferences, leading to a permanent shift in the demand curve for housing.” (Yes, maybe!)
“Mortgage debt servicing costs are currently eating up less than 4% of total household disposable income,” ING’s James Knightley wrote Tuesday, adding that “the success of working from home and the prospect than many employees will continue to spend less of their working life in an office and commuting also is likely to be boosting demand for properties further out of cities.”
Still, data from May — including new home sales and existing home sales — suggested demand may be cooling as prices levitate. The median sales price of new houses sold last month was $374,400, a record, while the average was $430,600 (figure below).
One imagines the market will level off unless i) would-be buyers suddenly become a lot richer, ii) the market presence of speculators and investors grows to offset the exit of people buying houses to live in them or iii) lenders materially relax standards in order to lure buyers into houses they can’t really afford. (Fortunately, the US has never experienced a housing crisis brought on by speculation, irresponsible lending and a willfully blind central bank.)
Finally, it’s worth reiterating that property inflation may eventually manifest in… well, in inflation, albeit on a lag, if history is precedent (figure below, updated).
I’d suggest that visual is something of a “chart crime,” but it’s popular, and I’d be remiss not to include it.
“Assuming the relationship holds we should expect the housing components to swing significantly higher in the months ahead,” ING’s Knightley went on to say. “Given their heavy weighting within the CPI calculation, it looks set to be the story to watch through the second half of this year.”
As ever, you can draw your own conclusions. That’s something of a cop out when it comes to closing punchlines, but unlike almost everyone else writing daily for public consumption, I’d rather tell you what’s going on, give you my take and leave the rest to you. I don’t presume to tell readers how they should think about markets — or anything else, for that matter.