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US Home Prices Climb Further With 86% Of Mortgages Still Handcuffed
US home prices are still rising. "Breaking news," I know. If you don't own one yet -- a home, I mean -- I don't know what to tell you other than "I'm sorry."
Data out Tuesday showed the nation's marquee price gauge rose a 12th month measured against the same period a year ago.
The S&P Case-Shiller 20-city index posted a 6.5% advance for June, according to the release, slightly slower than the prior month's YoY gain, but brisker than the 6.1% increase economists collectively expected.
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Any adjustment will take time.
Hasn’t the 10 year and subsequently the mortgage rate already factored in the first many Fed cuts? As you point out, to get materially cheaper through cuts would require a recession.
What I wonder is what happens when the league of America’s realtors — who now have Jerome Powell’s name on their lips like he’s Taylor Swift (and who presumably had never heard of FedFunds prior to 2020) — what do they do when he cuts 25 or 50 bps in Sept and the mortgage rate doesn’t move? (And heck, maybe after another few trillion are promised prior to the election even tick back up.)
With rates already down over a percent from peak, and purchase mortgage applications not picking up accordingly, what will their excuse be then?
“Hasn’t the 10 year and subsequently the mortgage rate already factored in the first many Fed cuts?”
Yes. And that’s an underappreciated point in my view. Every point on the curve is discounting deep Fed cuts. Additional outsized declines in long-end UST yields will probably require a material slowdown in growth and/or more labor-market softening.
That, in turn, raises this question: In the event the economy does evolve such that 10-year yields fall further, pulling mortgage rates lower, will that economic deceleration manifest as job (i.e., income) losses that mute or otherwise offset any incremental demand increase for homes that might otherwise accompany a return to five-handle mortgage rates?
My guess, for now, is that the answer’s “no.” That is: It’s probably the case that the labor market won’t turn hard enough to offset an increase in demand for homes even in the presence of a mild recession that pushes yields and mortgage rates lower.
But you never know. And you also have to factor in the possibility that in a recession, resale supply will be forced onto the market as homeowners who lose jobs sell to raise cash and/or to downsize.
All the second and third homes in tourist towns across the country, bought during the pandemic, were great income producers the last few years but many of their owners are already starting to choke on the mortgage, insurance, tax and maintenance expenses as their rental rates come down (over 20% decrease in my island town). Those units will come to market first, followed by low-rate mortgaged homes chock full of equity, when enough layoffs scare the sh*t out of those property owners. It’s the only way. And house prices do not always go up. Layoffs starting slowly already, and then gathering speed, will exact a market correcting toll on the housing market. I expect there will be a rush to sell homes, as prices start dropping, creating a buyer’s market. There’s more than one way to skin a cat, as my grandmother used to say. The Fed’s new “focus” on employment is already too late. But they probably knew that all along.
Yeah, and at the end of the day, this is still just a market. You do need a buyer, otherwise a “price” is just a number. It’s a bit difficult for me to take seriously — and another commenter mentioned this the other day in the context of one of his/her own properties — the notion that some lofts in and around the one I’m sitting in at this very moment have doubled in the space of 24 months, which is what I’m led to believe by the “Zestimates” and other such indicators. I don’t think there’s a lot of liquidity at these valuations/prices in my locale, but I guess I could be wrong. I’m here, after all, so there was some liquidity. 🙂
Ohh, two streets down a one bedroom, 1.5 bath loft went under contract today at $499k. That place was sitting on the market for $575k since I’ve been back in town — so, over a year. The seller owned two more in the area and both of those just got huge asking price reductions too. I assume that means he/she needs to get out for personal reasons (I’m going to find out tomorrow), but it’s super funny to see this just a few hours after I wrote this comment.
Suppose Fed cuts FF 200bp by end 2025 to about 3.0%, yield curve has a little positive slope so 10Y is 4.0%, and mortgage-10Y spread is a normal-ish 150-200bp, that suggests mortgage rate can go to 5.5% to 6.0%. Compared to current mortgage rates, that may add 10% or so to “buying power” – said without consulting a HP12C so treat that as a rough guess. It seems like a pretty finite opportunity.
Yes, Fed could cut FF by more than 200bp in coming year, or FF-10Y yield curve could remain inverted – neither would seem consistent with a healthy economy – and if that happens, rate volatility and economic uncertainty might keep the spread elevated.
Second homes and AirBnB properties may see selling pressure, but for those of us living in humdrum places that are not Aspen or Miami Beach, that feels like something we will watch at a distance.
My guess (not even an estimate, just a guess not even worth 2/10 cent) is that if we get a soft landing (no recession or mild recession), typical house prices will go up as lower rates make buyers arguably “richer”; if we get a hard landing, prices will go down as unemployment makes buyers unequivocally poorer; if we get a resurgence of inflation – a possible consequence of November – then prices will go down as inflation makes buyers poorer and 10Y and spread both rise.
Forgive my Economics 101 take, but if supply and demand both increase at the same time, wouldn’t home prices move mostly sideways? (Unless of course they should move higher which is what they always seem to do.)
Harris stated affordable home ownership as a goal for her administration, though she has been pretty sparse on specifics. Given the obvious “they don’t make more land” statement it seems to me the only quantifiable way to really deliver on this would be to incentivize multi-family home construction over single family. And they will have to dump a literal ton of money into those incentives to get enough housing built quickly enough to dent the above figures before the next election.
From articles on Harris’ housing policy – I realize the reporters’ summaries are not always consistent:
“building 3 million more housing units in four years, on top of the 1 million or so built annually by the private sector, through a new tax credit for developers who build homes aimed at first-time homebuyers and a $25,000 tax credit for those buyers.”
“$25,000 in down payment assistance for first-generation homebuyers and a $10,000 tax credit for first-time homebuyers.”
“proposed a $40 billion fund to encourage local governments to build more affordable housing, streamlining regulations and expanding rental aid, among other steps.”
This looks aimed at increasing supply and affordability for starter SFR (single family residences) which could be houses, townhouses, or I suppose condos, and increasing supply and subsidies for affordable MFD (apartments). Both are needed.
I also found references to these bills that she supported:
“called on Congress to pass the Stop Predatory Investing Act, a bill that calls for removing key tax benefits for those who own 50 or more single-family properties. This initiative would curtail major investors from buying up large sums of single-family rental homes.
Meanwhile, the Preventing the Algorithmic Facilitation of Rental Housing Cartels Act would crack down on companies who use algorithmic systems to fix market rent prices.”
The challenge is that there is not a shortage of “housing”. Housing units per capita, at 0.436, is higher now than it has ever been.
There is a shortage of affordable housing, whether that be housing affordable to the first-time homebuyer or housing affordable to the low-income renter. The challenge for affordability is not merely greedy sellers, rapacious developers, or obstructive regulations – building housing is inherently expensive.
Take DHI, an efficient, large-scale builder operating mostly in the development-friendly South. In 2023 its COGS per home sold was $309K. Add SG&A, financing cost, margin, and it is difficult to see how its houses can be priced lower than mid $300Ks (actual price was $405K).
As for affordable apartments, these are not cheap to build. Many subsidized/regulated affordable apartment buildings have gone up in my city, using public financing and tax benefits. These typically cost $300-400K per unit.
Yes, a good deal of COGS for single family houses is land (roughly half, for DHI). For smaller apartment buildings (think 4-6 story, not skyscrapers), you’d think a far smaller part of COGS would be land cost, but you’d be wrong, because the more intensive the permitted use, the more expensive the land. This is why the primary beneficiaries from up-zoning are always the owners of the land. Still, reducing construction cost will go a long way to reducing housing COGS.
We still build houses and smaller apartments much the way we did a century ago. I think we need a revolution in construction techniques. Instead of laboriously stick-building individual walls on site, mass produce standardized wall sections in factories. The pre-built sections should come pre-insulated, pre-wired, pre-plumbed, and pre-finished with windows and doors, with plug-in or screw-together connectors for electric and plumbing. Floors should similarly come in sections, structurally designed for quick assembly onto a grid of pre-cast foundation pieces. Roofs should come in pre-built panels, solar PV film included, dropped onto pre-built trusses. Assembling a foundation and floor, then walls and roof, into a house on-site should take two days for a small crew and a crane. Designing a house, or a small apartment building, should be a matter of specifying the standardized sections, which will fit together like Legos whose structural properties have been pre-engineered and loaded into widely available software.
These will be, and look like, mass-produced houses. But many of the house styles that we now consider desirable became popular because they were cheaper and quicker-to-build. There will be an aftermarket for pre-built sections to add a room or second story. Changing the back door for French doors may be as easy as unbolting the old wall section, unplugging and re-plugging electrical, and bolting in the new wall section. Over time, these houses will acquire individuality and variety. Even old house snobs like me may steer their kids toward the new “System” houses where there’s no lath-and-plaster to break out, no cast-iron pipes to saw through or copper to sweat, every wall already has all the pre-installed receptacles and switches anyone could want, and adding a bedroom takes a day.
Granted, houses sell for what the market will bear, not for their COGS. If homebuilding becomes much simpler, and land development similarly streamlined, there should be no shortage of competition to hold down margins.
This is all great analysis, but the problem with this whole discussion is that eventually — hopefully not in our lifetimes nor in your children’s / grandchildren’s lifetimes, but eventually — this will result in the simple commandeering of land and houses by the priced-out masses. History’s pretty clear on this: You can’t just oppress a majority forever, or at least not without being prepared to kill them. Because they’re the majority. At some point, they’ll just come and take everything by force.
So, whether it’s 50 years from now, 100 years from now or 150 years from now, Western society, and advanced economies more generally, will need to get this figured out, where “this” is how to make sure regular people have a place to live. If not, the poor will figure it out on their own.
It’s easy enough to scoff at that (what I just said), but if you think about what this looks like to — well, to a whole helluva lot of people — they see billionaires blasting themselves off into space (literally), while we pay school teachers $50k/year and charge them 7% to finance homes that cost 10x their annual salaries. It’s manifestly absurd on a philosophical / existential level, which is to say on a level that supersedes the margin / profitability calculus for homebuilders. That won’t work forever. It’s politically untenable, and if politics proves to be an insufficiently expeditious avenue down which people can drive to get it fixed, they’ll go down other avenues.
Again, I think we’re a very, very, very long way away from that tipping point, but I don’t know why we would run the risk. This is plainly getting out of control, and you’d think we’d want to address it if for no other reason than self-preservation (i.e., so we don’t end up getting eaten by the villagers).
Stepping back a wee bit further, capitalism is absolutely dependent on the sanctity and enforceability of contracts.
As JL and you note, elites only respond when the pressure from below threatens to destabilize the enforcement of civil contracts.
One tipping point can be when the police and military the wealthy rely on to enforce the rules become unreliable.
Thankfully for America’s elite, their GOP has been able to direct popular resentment to blaming immigrants, Mexico, China and woke liberal elites rather than the US companies which hire illegals, moved goods production offshore and outsourced service jobs to India and the Philippines.
But, how about them Nvidia results?
Immigration is a win-win for the GOP donors: they get cheap labor and scapegoats!
Honestly, I don’t think we are a “very, very, very long way away”. I am guessing that I am older than you and that this will occur in my lifetime. I think about this all the time and I am trying to balance out: not giving money to my kids now (which might undermine their drive and ability to become the best they can be) and waiting too long so that my money gets taken by government taxes, fees or inflation, leaving me without much to give my kids.
So, add pre-built fortification and gun emplacement sections?
More seriously, humans address risks when they are imminent, not remote. Climate change, pandemic, asteroids, we ignore until they are on our metaphorical doorstep. Affordable housing will be no different.
Exactly. That’s precisely what I was driving at. (The part about when we address risks, not the gun turrets, but those too).
Much of this is already being done. Or so a developer friend has told me since 2018 or earlier. Its enevitable, so your vision is not a far-fetched.
I don’t think there has been much adoption of next-gen construction methods in the US. There is a little use of Structural Insulated Panels (SIP) and other pre-built components, more often in larger and commercial buildings, and homebuilders are using more pre-painted siding such as from JHX, but I think nearly all of a house and mostly all of a smaller apartment building is still being pieced together on site. There is more adoption in Europe, I believe.
To the extent SIPs are being used in the US, I think and have been told the process mostly trades on-site time for manufacturing lead time, and doesn’t really cost any less – the house is designed, goes through engineering review and permitting, drawings and specifications for the SIPs are transmitted to the SIP manufacturer, converted to the software they use, then put in a queue for manufacturing – they are custom-fabricated to order, by a rather small number of SIP manufacturers – and shipment. Sure, the SIPs can be assembled on-site in a day, but you might have waited months for them. Then the SIPs have to be wired and plumbed using standard methods – pulling wire, cutting holes, etc – and exterior cladding applied.
Inline with what he told me. He even tried to set up a SIP manufacturing venture but funding dried up.