US home prices have bottomed. At record highs.
I’m just joking. But not entirely.
Both Case-Shiller home price indexes posted solid monthly gains for March, data released on Tuesday showed. The national index rose 0.42% from the prior month and the 20-city gauge 0.45%, in what S&P Dow Jones’s Craig Lazzara suggested might’ve signaled the end of a nine-month swoon for the housing market.
On a YoY basis, the 20-city index fell 1.1%, less than the 1.6% drop consensus expected.
The national gauge rose on a 12-month basis, albeit barely. The 0.66% increase was the smallest in 11 years.
Frankly, it’s hard to know what to say about Lazzara’s assessment of the market. He may well be right, but US property prices are still some 30% above pre-pandemic levels. Mortgage rates are stuck between 6% and 7% (the 30-year fixed was the highest since SVB collapsed last week). And various measures of affordability suggest it’s never been less attractive to buy versus rent.
The figure below, from the University of Michigan sentiment survey, shows how concerned Americans are about a predicament where both sides of the affordability math are working against them.
If prices start rising again, rates don’t come down materially and resale supply doesn’t increase (a prerequisite for lower prices), Americans who want to buy will have to i) agree to monthly payments that are some 40% higher than they were a little over a year ago, ii) settle for properties they don’t ideally want because they’ve been priced out of desirable homes and neighborhoods, iii) avail themselves of builder incentives on new construction to make the math work or iv) come up with a lot more money.
It’s hard to get around that assessment. The specter of an economic downturn is also a factor to the extent it could cause some would-be buyers to reconsider. Of course, the “good” news is that lost jobs in a recession could prompt more existing home sales, thereby helping to alleviate the acute supply shortage that’s propping up the market.
Even as he suggested prices might’ve bottomed, Lazzara conceded that “the challenges posed by current mortgage rates and the continuing possibility of economic weakness are likely to remain a headwind for housing prices for at least the next several months.”
Separately, FHFA’s gauge rose 0.6% in March from February, triple the expected advance, double the highest estimate and the third monthly gain in a row.
The government released quarterly figures on Tuesday as well. US home prices rose 4.3% YoY in Q1 and 0.5% from Q4.
“Prices generally increased modestly in the first quarter,” Anju Vajja, a director in FHFA’s research division, said. “However, YoY prices in many western states have started to decline for the first time in over ten years.”
My guess is that it’ll take more than a few months of falling YoY prices to restore anything like a sense of normalcy to the market. The problem is that a buyer’s strike isn’t as effective when sellers are striking too. New construction can’t possibly fill the entire void, or at least not on a compressed time frame.
It’s a vexing situation for all parties. Or, as NAR Chief Economist Lawrence Yun called it last month, “a unique market.”
The population is barely growing so who’s fueling the demand for buying or renting? What are they leaving behind? Who’s going to buy that stuff? I’m not a NAR staff economist but somehow the math doesn’t seem to work.
In Canada 99% of mortgage terms are 5 years or less. A few years ago they put a stress test in place whereby people had to qualify for their mortgage (acceptable debt service level) at a rate 2% higher than the current 5 year rate, those mortgages will start coming due in the not to distant futue (of course prices have gone up so most people can sell vs default). In addition, the banks have already done a lot of work extending the amortization period for homeowners whose payments on floating rate mortgages no longer covered the interet at the higher rates. Will be interesting to see if those 2 factors have any influence on the markets going forward.
I don’t think it’s about current population growth but is about the homebuying demographics. It is huge. Couple that with Baby boomers not being able/ wanting to sell their home for many reasons and new construction catering to move up buyers and not first time buyers.