Carbonite

US home prices rose at the slowest annual pace since December of 2020 during the final month of the third quarter, key data out Tuesday showed.

The S&P CoreLogic Case-Shiller National index increased “just” 10.65% YoY in September (figure below), down markedly from the prior month’s near 13% rate of appreciation.

On a monthly basis, prices fell both on the national gauge and the closely-watched 20-city index, which is likewise flirting with a single-digit 12-month pace.

The MoM drop on the 20-city gauge was 1.24%, an encore of sorts following a similarly large monthly drop in August.

“As has been the case for the past several months, our September 2022 report reflects short-term declines and medium-term deceleration in housing prices across the US,” Craig Lazzara, managing director at S&P Dow Jones Indices, said.

The updated figure (below) will be familiar to regular readers. It shows the rate of deceleration from month to month in the annual pace of price gains.

Never before has the 12-month rate of price appreciation for US homes decelerated at a comparable pace to what’s transpiring currently.

“September’s housing data [isn’t] immediately tradable, but the update on the real estate sector nonetheless brings to mind one of the primary risks to the economic outlook and ultimately our view on the rates market in 2023, specifically, that the thus far orderly slowing in housing accelerates beyond the Fed’s comfort zone and risks a more material contagion effect into the broader economy as the wealth effect spreads to consumption as a whole and mortgage delinquencies rise,” BMO’s Ian Lyngen and Ben Jeffery said. “To be clear, this risk need not spiral to the scale of the 2008 financial crisis, but there is certainly the prospect that the move lower in housing reaches the point when the Fed may begin to ponder the appropriateness of mortgage rates that remain at effectively their highest level in two decades,” they added.

Meanwhile, FHFA prices posted a surprise monthly gain in September. The 0.1% increase stood in stark contrast to expectations for a 1.2% drop. The small increase snapped a two-month run of large declines (figure below).

The annual rate of appreciation in September was 11%.

On a QoQ basis, prices were flat, but the four-quarter rate remained very elevated at 12.4% (figure below). Believe it or not, that was the coolest pace since Q4 2020.

“House prices were flat for the third quarter but continued to remain above levels from a year ago,” William Doerner, Supervisory Economist in FHFA’s Division of Research and Statistics, said Tuesday. “The rate of US house price growth has substantially decelerated,” he added, calling the deceleration “widespread with about one-third of all states and metropolitan statistical areas registering annual growth below 10%.”

Earlier this month, I described the market as being “encased in carbonite like Han Solo.” Some readers found that characterization helpful and also amusing.

I was amused to discover the very same characterization in a Bloomberg piece published Monday. “This is Han Solo in carbonite,” Benjamin Keys, a real estate professor at Wharton, told Prashant Gopal. He was referring to the same dynamics I described here on November 7.

Buyers are priced out of the market and even if they weren’t, financing costs are too onerous. At this juncture, the math dictates that if you don’t make at least six figures, you can’t afford the median US home. At the same time, sellers are reluctant, knowing they missed the peak. If they do manage to find a buyer and intend to finance any portion of a new property, they’ll be trading a rock-bottom mortgage for a much higher rate.

Read more:

US Housing Bubble — Something’s Gotta Give

$100,000

“There really aren’t any forces to unthaw [the market] in a rapid way,” Keys went on to say.

Mark Zandi disagrees. “Once the job market starts to turn — and it will — the pressure will intensify,” he told Bloomberg, for the same linked article mentioned above. Zandi was alluding to the prospect of new inventory in a recession.

Meanwhile, the bullish tone in Treasurys should help would-be buyers. Mortgage rates are likely to move lower as long as bonds continue to rally. Whether that’s good or bad depends on the extent to which it precipitates inflationary “FOMO” among families sidelined by affordability constraints.

My contention continues to be that prices will fall nationwide at some point next year. As Bloomberg put it, “for the logjam to break, affordability has to improve, and that means a significant drop in either prices or rates.” Said differently: Something’s gotta give.