Home prices rose less than anticipated in July.
Consensus expected S&P/Case-Shiller’s 20-city index to post a 20% YoY gain in data out Tuesday. Instead, the gauge rose just 19.95%. Things are cooling off.
That’s dry humor, of course.
The national gauge rose 19.7% for the month. That was up from 18.73% in June, and another “biggest gain since at least 1988” moment (figure below).
The numbers are hardly surprising. Although more recent data suggests the market might be slowly normalizing, pandemic dynamics are still firmly in control.
“The last several months have been extraordinary not only in the level of price gains, but in the consistency of gains across the country,” Craig Lazzara, global head of index investment strategy at S&P Dow Jones Indices, said Tuesday.
Last week, government data showed new home sales were more robust than expected in August, even in the face of surging prices. The median price rose more than 20% YoY last month. But supply pressures do appear to be abating. Months’ supply of new homes stood at 6.2, 60% higher than January, for example. Also last week, the NAR cited “financial limits” while discussing a slowdown in existing home sales.
“In July, all 20 cities rose, and 17 gained more in the 12 months ended in July than they had gained in the 12 months ended in June,” Lazzara went on to say Tuesday, noting that prices in 19 of 20 cities are now at record highs. The only exception is Chicago, and it’s just 0.3% below its 2006 peak, Lazzara remarked.
The monthly gain in July on the national index was 1.6%, down from 1.8% in June. As a reminder (one you surely don’t need), the September vintage of the University of Michigan’s sentiment survey showed Americans’ assessment of buying conditions for homes is near a record low (figure below).
A new study from real estate startup Tomo suggested the average American would now need to save 10% of monthly income for eight years to afford a downpayment.
Prior to the pandemic and the attendant housing bonanza, that figure was seven years. In an interview with Bloomberg, Tomo principal economist Skylar Olsen stated the obvious: “Folks who have a lot of rent burdens tend to save nothing, and there’s always a fairly sizable share of the population who have a pretty substantial rent burden.”
As Deutsche Bank’s Aleksandar Kocic put it last year, “In the absence of a major disruption, the system is capable of moving along by collecting small installments of rent (‘clipping the coupons’) from a large segment of the population. However, if an exogenous shock disrupts the fragile order of these cashflows, there is a chain reaction of collective insolvency ready to sink the entire system.”
It used to be a rule of thumb that house prices were at fair value at 3x income. Now look at it? It is like 8x in the US and 40x in Beijing, and speaking of China did I see that housing share of wealth is like 60% of assets, or 3x what it is in the US, although it is true that many in the US do not own houses and are renting. Nevertheless, dismissing the real estate threat in China seems a little naive.
All risk assets including housing is inflated by low interest rates. I would take the downpayment shock thing with a little grain of salt. FHA/VA , state housing lenders, or mortgages with PMI are available with lower downpayments. There is still an affordability situation for those in the bottom 2/3 of the income strata. Of course the bottom 40% probably should not own anyway. Their issue is high rents and a shortage of subsidized or public housing. GIven the tax structure now, many don’t have enough deductions to itemize so owning is not a great deal in most markets if you are low middle to lower income anyway. I do not want to dismiss the idea of owning is not a good thing on many levels- I own myself. But home ownership for many is not a be all and end all. For many, health care, education and simply an adequate level of income and resiliency to bad events is a much bigger issue. When the Fed did their study and a large part of America did not have 400 bucks to meet an “emergency” like having enough money to make a small car repair, you know that a large swath of the general public either lacks sufficient income or the financial literacy to manage their money effectively- or both.
FYI the standard deduction is $25,100 for married couples now I believe. That was what I was referring to about the tax structure.
40th percentile household income in the US is roughly $60K, I think. In “theory” that household can afford payments on up to a $400K mortgage at 30y 3.5%. $60K is two people making $18/hr for 40 hr/wk. This is if they manage their finances tightly, don’t have very bad luck, etc. Not easy. Not easy at all. But just possible.
I don’t have any big insight here. Just thinking that, while as investors we look at low-end jobs offering $18/hr and think “OMG labor shortage inflation margins multiples portfolio risk blah blah” . . . as people we should be cheering every time we see a sign advertising $18/hr.
Wage inflation is a good thing. Maybe not for investors, but for the people who are most in need of a goodness.
Okay, after that brief detour into humanity, putting the investor hat back on. “OMG labor shortage inflation blah blah . . .
$400k @3.5% is around $2400/mo including property taxes and insurance. Is it really possible to spend almost 50% of gross per month?