US home prices posted the smallest annual gain in 29 months in December, data released on Tuesday showed.
The 5.76% rise for the S&P/Case-Shiller national gauge counted as the most tepid YoY increase since July of 2020, underscoring how higher mortgage rates were (past tense) finally beginning to cool the red-hot US housing market towards the end of last year.
The closely-watched 20-city index rose just 4.6% from December of 2021, slightly less than anticipated.
Eventually, the moderation in home price growth, along with developments in new leases, will manifest in cooler readings for CPI shelter gauges, aiding the Fed’s efforts to correct the inflation problem they helped stoke.
The concern, though, is that the decline in financing costs from last year’s highs is beginning to lure buyers from the sidelines which, when considered with still tight supply, could bolster prices anew, thereby derailing the path to better inflation outcomes.
The rate of deceleration in the pace of annual gains continues to be historically large. The figure below shows the month-to-month change in the YoY rate.
On a MoM basis, the 20-city index fell a sixth month in December.
Government data out late last week suggested new home sale were robust in January amid a record MoM drop in prices, while figures released Monday showed pending home sales boomed last month, perhaps presaging an imminent recovery for sales of existing homes, price growth for which looks poised to turn negative on a YoY basis for the first time in 132 months+.
And yet, Treasury yields have risen sharply in recent weeks, suggesting the reprieve on borrowing costs could prove fleeting. “The prospect of stable, or higher, interest rates means that mortgage financing remains a headwind for home prices, while economic weakness, including the possibility of a recession, may also constrain potential buyers,” Craig Lazzara, managing director at S&P Dow Jones Indices, said Tuesday. “Given these prospects for a challenging macroeconomic environment, home prices may well continue to weaken.”
The Fed certainly hopes so. It’d take an outright collapse to wipe away the equity accumulated during the pandemic boom, and not much in the way of additional gains to fuel consumption and inflation. As such, the risks are asymmetric.
Meanwhile, FHFA prices fell less than expected in December from November. The 0.1% MoM decline on the government’s index was half the expected drop. Quarterly figures, released concurrently on Tuesday, showed prices rose 8.4% between Q4 2021 and 2022. Prices were 6.6% higher in December versus the same month in 2021.
“House price appreciation continued to wane in the fourth quarter,” FHFA supervisory economist Nataliya Polkovnichenko said, citing higher rates and a decline in mortgage applications. “These negative pressures were partially offset by historically low inventory,” Polkovnichenko added.
The rebalancing is in train. One of the problems of using annualized numbers is they don’t catch inflection points until much too late. The direction of the economy for residential housing is clear- it is slowing down One good way of thinking about this is to look at mortgage rates versus home price growth, say a 3 month annualized rate. If mortgage rates are higher (30 yr ~6.75% right now) than home price appreciation, financial conditions are restraining. Right now you would have to say that if anything prices are at least flat if not down over the last 3-6 months. So my conclusion, at least for the residential real estate market, is that financial conditions for this sector are very tight. In 2021-22 on the other hand mortgage rates at 3% were about 15-20% lower than home price appreciation- conditions then were loose for residental real estate. Residential real estate is a first mover- it will pick up and slow down sooner than most other sectors in the economy. It is trying to tell us something. This time is not so different. We are in the process of rebalancing the economy worldwide after two large shocks. War and pandemic. We have some time to go, but the economy is definitely well along towards adjusting (barring any new shocks).
+1
Since prices peaked in April 2022, we’ll almost definitely be in a YoY decline in housing prices soon.
And still with that, housing affordability is way out of whack with incomes. In most major markets, anything close to the “core” a “middle class” home requires an income in top 10% bracket to afford the mortgage on a 80/20. This is unsustainable. Incomes are unlikely to rise enough to change that calc meaningful, thus price would be the metric to give.
All of the current data is in an environment where consumption is strong, but is the consumption sustainable? With significant increase in debt (credit card balances, home equity loans), it seems like many are spending beyond their income level, which usually resets at some point.
Basically, my belief is: when the yield curve inverts, believe it. A potentially significant recession is coming in the next 18 months give or take.
I might be a bit dense, but I don’t understand why cooler housing prices would drive down the CPI shelter gauge if the total cost of ownership is either flat or still increasing once you factor in financing costs? It looks like the largest part of the gauge is owner’s equivalent rent, but without expanding supply, why wouldn’t that continue to rise? I know at some point the consumer will be tapped out, but housing is one of the absolute last things people will give up in their budget.
I also get why the Fed needs to raise rates and probably needs to go even higher, but it seems to me that shelter costs will just continue to get worse and worse absent a significant downturn on par with the Great Recession. What are the odds the Fed would be willing to countenance that going into an election year? This a textbook case of “damned if you do, damned if you don’t” for the Fed and the housing market.
I wondered about this as well. https://heisenbergreport.com/2023/02/14/crucial-us-inflation-report-couldve-been-worse/ Note that since then I’ve looked at other charts that show OER and rent of primary residence actually track each other fairly closely – which means my “perhaps” speculations are quite likely wrong.
In today’s WSJ there was a front page story “Apartment Rents Fall as Market Sees Wave of New supply.”
Was that new supply a function of higher interest rates? And will they hinder future rental property construction?
I think that this mostly reflects a lot of multi-family projects financed when rates were low, then permitted (green line in chart linked) after a lag, then started (red line), and eventually moving to completion (blue line).
https://fred.stlouisfed.org/graph/?g=10zuS
Permits peaked in 3Q22, starts are rising toward a peak, and completions are just now starting to inflect up. Supply chain and labor shortages probably affect the lag. I’ll guess that completions will peak sometime in late 2023. I’ll also guess that current borrowing costs and cap rates are likely to put a damper on new permits and new starts from here.
https://cre.moodysanalytics.com/insights/market-insights/the-fed-and-banks-are-putting-the-squeeze-on-multifamily-cap-rate-spreads/
This is part of the bear case for apartment REITs. However, there’s also fewer renters “lost to ownership” and the inflation hedge aspect of leases that get repriced annually.