US Home Prices Stage ‘Final Parabolic Spurt’

The historic surge in US home prices took another dramatic leg higher in what may be seen, in retrospect, as the last gasp of the pandemic boom.

The Case-Shiller 20-City Index rose 21.2% YoY in March, data out Tuesday showed. That was easily ahead of consensus and quicker than the prior month’s annual pace. The 20.55% increase on the National Index was the largest in history.

On a MoM basis, the 20-City gauge rose 2.4%.

In all likelihood, March was the peak. If April’s data, due next month, shows a larger YoY gain, it’ll be a reflection of sellers and buyers rushing to beat the rising rates clock. “Those of us who have been anticipating a deceleration in the growth rate of US home prices will have to wait at least a month longer,” Craig Lazzara, managing director at S&P Dow Jones Indices, remarked.

Separately, the FHFA Home Price Index posted a 19% YoY gain in March, the government said. The MoM increase, 1.5%, was cooler than expected and matched the lowest estimate from a dozen forecasters.

William Doerner, FHFA’s supervisory economist, cited “strong demand coupled with tight supply.” “Through the end of March, higher mortgage rates [had] not yet translated into slower price gains,” he said.

The index rose 4.6% QoQ (figure above). It was the seventh consecutive outsized quarterly increase.

The nine-week surge in mortgage rates that culminated in an average 30-year fixed rate of 5.30% began in early March, but buyers would’ve locked in lower rates prior to that. “Counterintuitively [higher rates] actually boost the housing market for a final parabolic spurt,” Lehman veteran Mark Cudmore wrote. “This has always been the case at the start of telegraphed hiking cycles, as buyers speed up their purchase timelines,” he added, calling this “a tipping point” and cautioning that some observers may be underestimating “the speed of the subsequent turn… as people forget the daisy-chain impact.”

Almost all recent indicators of housing market activity suggest a slowdown is imminent. New home sales slumped nearly 17% last month, for example. Pending home sales dropped a sixth month in April, existing home sales a third. Housings starts are slowing, homebuilder sentiment is falling and mortgage applications are drying up. Doerner flagged the “significant falloff” in new home sales in April, but I’d note the decline was accompanied by an almost 90-degree upturn in average prices, consistent with Cudmore’s assessment.

If prices did peak in March (or April), it’s not a moment too soon for a Fed trying to exorcise its own demons. The figure (below) is updated with the latest Case-Shiller data.

The Fed flagged the possibility of active sales from the MBS portfolio in the May FOMC minutes, even as such a push, were it to occur, wouldn’t commence until balance sheet rundown was well underway.

The University of Michigan survey suggests Americans have almost never harbored a less favorable view of buying conditions for homes. With disposable incomes under pressure and borrowing costs rising, the deck is stacked against further price gains.

“Mortgages are becoming more expensive as the Fed ratchet[s] up interest rates, suggesting the macroeconomic environment may not support extraordinary home price growth for much longer,” Lazzara said Tuesday. “Although one can safely predict that price gains will begin to decelerate, the timing of the deceleration is a more difficult call,” he added.