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.
“(Fortunately, the US has never experienced a housing crisis brought on by speculation, irresponsible lending and a willfully blind central bank.)”
That’s right! It was irresponsible home buyers who didn’t read their contracts that were at fault, that’s why the poor banks and credit agencies were completely let off the hook and bailed out while regular people moved into tents. 😉
Would changing the duration of mortgages qualify as relaxing standards? 30 year is basically the go to now as opposed to 15 or 20. 50 year or interest only loans anyone?
The real question is becoming… will anyone ever build more first time homes? Homes in the $150-250k range. 100% of the new homes being built in my area are $375+ with the average being around $450k. I’m talking the entire greater Minneapolis/Twin Cities Metro area. They sit empty if nobody is buying but they do not get discounted. That seems to be anchoring prices unlike in the GFC when you had tons of new construction going on at lower price points. The “cheap” houses are going for $300-350k and are 40-100+ years old and in need of repairs generally.
What feels different this time is also the location aspect. Assuming remote does not become long term ubiquitous then there is going to be growing premiums on proximity to work and community. There is only so much land that is within a 30 minute drive of any downtown metro area and more and more cities are going to be hitting the limitations of surface area without lots of high density residential housing which… it turns out many voters, especially home owners really dislike.
The suburbs and second/third tier metro areas are having their day. It will last awhile longer. Then the younger folks will start streaming back to the larger metro areas for more opportunity/fun. It is already happening in NYC- such churn is typical for NYC. Best bet for NYC is a bottoming for two more years then a major upswing in about 3 years time. It happened after 9/11. It will probably happen again in a somewhat elongated form since covid problems will linger a bit longer than a terrorist strike. Work from home is vastly overated. I have done it for 10 years- and will probably do it for the rest of my career. But it is far from a panacea. The workforce will want more flexibility- but the glory of remote work will burn out fast.
I’ve been remote working for 10 years, I think it holds up quite well.
I think remote work is likely to change over time but given what I know of my generation that grew up as cell phones and the internet became mainstream we’re a lot more comfortable than the guys sitting in the VP and directors offices today. It may well contract but it will expand again and flexibility will become normal. Give it another decade and virtual telepresence will be on par with anything you’d expect in person today. This last year was the massive test case that gave every product manager a gold mine of end user experience data as non-first adopters jumped in with both feet. 100% remote work is already the norm in a lot of remote offices with only occasional in person trips to corporate HQ. I doubt very much many in my generation will care about what empty cubicles look like when we can check IT stats and see people are engaged.