US Home Prices Won’t Go Gentle Into That Good Night

Data released on Tuesday underscored both the impact of the Fed’s ongoing quest to extinguish the hottest inflation in a generation, and the difficulty inherent in the task.

The most commonly cited measure of US home prices suggested the annual rate of property value appreciation continued to decelerate in October, due in no small part to soaring mortgage rates and tighter financial conditions brought on by the Fed’s aggressive rate hikes. And yet, price growth didn’t fade as quickly as economists thought it might.

The S&P CoreLogic Case-Shiller 20-City Index, which is reported on a two-month lag, rose 8.6% YoY in October, ahead of the 8% consensus expected. It was the first single-digit annual print since November of 2020.

The National Index rose 9.24% on a 12-month basis, the slowest pace in two years.

To be sure, there’s a sense in which consensus isn’t really important here. For one thing, economists are wrong far more than they’re right, and consensus just represents an effort to use the most basic of statistical methods (find the median) to correct for that problem.

For all the weight market participants place on “beats” and “misses,” what ultimately matters in the context of the housing price data isn’t an overshoot versus the combined wisdom of economists, but rather the fact that the pace of appreciation in property values is decelerating, and that, eventually, shelter inflation will too. The problem is the lag, which is considerable.

Until shelter inflation abates, the broader fight to rein in price growth will remain an uphill battle.

Note that over the past several months, the pace at which the 12-month rate of home price appreciation fell was unprecedented. In October, that pace slowed.

The chart illustrating that dynamic is illuminating, but it’s important readers understand what it shows. Below is the month-to-month change in the annual pace of home price growth.

“As the Fed continues to move interest rates higher, mortgage financing continues to be a headwind for home prices,” Craig Lazzara, managing director at S&P Dow Jones Indices, said Tuesday.

“Given the continuing prospects for a challenging macroeconomic environment, prices may well continue to weaken,” he added, in a press release. Since the summer, Lazzara took to describing the deceleration in the annual pace of price appreciation as “forceful.”

I’d remiss not to include the customary reminder that the Fed is partly to blame for their own predicament. The decision to persist in turbocharging a housing market that was already on fire looks misguided in hindsight.

On a monthly basis, the Case-Shiller 20-City gauge dropped 0.52%, less than half the MoM decline seen from August to September. The National Index fell 0.26% in October, much softer than the prior month’s 0.85% drop.

Meanwhile, the FHFA gauge showed prices rose 9.8% YoY in October, and were unchanged on a monthly basis. “US house prices have seen two consecutive months of near-zero appreciation,” Nataliya Polkovnichenko, the supervisory economist in FHFA’s research division remarked. “Higher mortgage rates continued to put downward pressure on demand, weakening house price growth.”

It’s worth noting that consensus expected FHFA prices to drop 0.7% in October. The unchanged print thus suggested the market is more resilient than economists anticipated. And, perhaps, too resilient for the Fed’s liking.