The Fed’s efforts to pop a housing bubble they helped facilitate are working.
The pace of US home price growth decelerated “forcefully” for a second consecutive month in August, key price data released on Tuesday showed.
The Case-Shiller 20-City Index rose 13.1% YoY that month, cooler than the 14% pace consensus expected. The 12.99% gain on the national gauge was the slowest since February of 2021, and represented a marked deceleration from July’s pace. In fact, the month-to-month deceleration in the pace of annual price gains hit another new low in August (figure below).
To clarify, that’s the difference between the most recent month’s annual pace of price growth and the prior month’s pace.
“The forceful deceleration in US housing prices that we noted a month ago continued,” Craig Lazzara, managing director at S&P Dow Jones Indices, said Tuesday. The pace of home price growth fell in all 20 cities which comprise the headline index.
“These data show clearly that the growth rate of housing prices peaked in the spring of 2022 and has been declining ever since,” Lazzara went on to say.
The figure (above) illustrates Lazzara’s point. Mortgage rates have climbed markedly since August, homebuilder sentiment has deteriorated dramatically and the balance of housing market date is poor, even as constrained supply is expected to keep prices at least a semblance of buoyant.
Note that the MoM decline for the Case-Shiller national gauge was double July’s monthly drop. The 1.32% MoM drop in the 20-city index was the largest since March of 2009.
Meanwhile, FHFA prices dropped 0.7% in August from July, separate data out Tuesday showed (figure below). That was a bigger drop than expected.
August’s decline marked the second monthly drop in a row. That hasn’t happened in more than a decade.
“The recent monthly decline solidifies the deceleration of 12-month house price growth that began earlier this year,” Will Doerner, Supervisory Economist in FHFA’s Division of Research and Statistics, said Tuesday. “Higher mortgage rates continued to put pressure on demand, notably weakening house price growth.”
Every region saw a decline with the exception of New England. West North Central prices were flat from the prior month.
As alluded to above, a lack of inventory is generally seen as an unshakable pillar for prices. I’m not aware of anyone (or at least no one who’s taken seriously) who currently sees a proper “crash.”
Still, I’d remind readers that the definition of “crash” in the US housing market is quite a bit different from what that word would entail in, say, equities. My guess is that, demographic tailwinds and support from insufficient inventories notwithstanding, we’re going to be staring at price declines that are considerably larger than most analysts currently expect within nine months.
“Demand is weakening as mortgage rates surge while housing inventory for sale is on the rise, meaning further large price falls are probable,” ING remarked. “Bad news for new homeowners, but it can help to get broader inflation lower quickly.”
The real shoe to drop will be inventories. Low rates have slowed that down as sellers are reluctant to walk away from low rate mortgages. Once you see inventories build with slowing sales you get a price drop to accelerate. It should not be as bad as 08-09 because underwriting for lending is better this go around.
I hope you are correct- two of my 20-something children would like to purchase a home- but are currently “on hold”.
However, both live in large Southern California cities, so I am not so sure about any significant price declines- hope I am wrong.
Real prices will drop, nominal some
House prices are not the only indicator of inflation in the residential R/E market. Love to see how rents are trending and what’s happening to commercial property prices.
Lucky One – Two weeks ago I spoke at length with a classmate at a B-School reunion. He is a principal at a large private commercial property group. I asked him about pricing in the markets they operate in. He answered that with funding costs up so much, would-be buyers have dropped their bids pretty much across the board.
Sellers, however, have been stubbornly sticking to offers that may have made sense when interest rates were much lower but not anymore. I opined that it sounded like the residential market where sellers keep thinking/hoping that the house they are selling should still be worth the same as the home down the street that sold for a smart price two years ago when mortgages were more affordable.
He agreed and further commented that he is only just starting to see sellers lowering prices to reflect the new reality.
I asked if the seemingly cost-insensitive Private REIT kind of buyers were still so aggressive. He answered they are not. In fact, he had seen many simply drop out of the market.
All anecdotal but perhaps a good tell.
Home prices and housing costs are way too high. As others have noted, we need price drops (in rents, too, not just a deceleration in price growth. Once it gets to its terminal rate, I’d love to see the Fed really focus on shrinking its MBS holdings.
Well, MBS is spread product, so it’s not as simple as — you know — “well, we’ll just start actively selling these and everything will be fine.” There would be knock-on effects. But ultimately, this situation is a disaster. As I wrote the other day, Fed easing made homes unaffordable on the price side and now Fed tightening has made them unaffordable on the financing side. And the price declines associated with the latter dynamic are going to hurt people who bought at the peaks with small down payments.
“and the price declines associated with the latter dynamic are going to hurt people who bought at the peaks with small down payments….”
But it’s not the Fed’s job to protect every investor, or investor class, who decides to put their hard-earned money into an investment — especially a home purchase at the top of what everyone could see was an unstainable bubble. It’s capitalism — caveat emptor.
Rightly or wrongly, that kind of Calvinist rhetoric is a big reason that populists are gaining support in the US and elsewhere.
Buying at peak price with minimal equity, that’s dangerous no matter what. No way to protect those folks if they have to sell now. Arguably no need to protect them either. Their mortgages are non-recourse, that’s the protection. If they don’t have to sell, they at least locked in generationally low rates.
Everyone else, either their big RE gains will become somewhat less big gains, or they wait until rates and prices adjust to buy.
The glitter and lipstick are different but the pig is more bloated this time than in 208. When demand collapses then month’s supply will increase. There will be defaults and walk-aways and evictions. Investors who purchased with ARM’s will bail. Rentals are already returning in the 4% range. Bonds look a lot better and a lot less risky.