High demand, partially due to the pandemic, along with a strangled supply, ensure continued inflation for the near future.
By Manuel Gutierrez, Consulting Economist to NKBA
Recently released data on September home sales revealed that house prices have jumped over the last year, with new homes priced 9% higher than last year, while existing homes surged by 12%.
Although these are substantial price increases, they do not always reveal the true, underlying changes in the price of homes. What they do reflect are average prices of houses sold in a given month without regard to variables, such as whether there were a higher percentage of larger houses sold that month or whether more sales in a particular region tipped the national average one way or the other.
The Consumer Price Index, released on a monthly basis, actually compares prices of the same, identical products from month to month. The only thing that changes is the recorded price. To address this issue for housing, economists have come up with “price indices” that attempt to remove the effect on house prices of all factors that may bias a comparison, with the goal of showing an index that reflects the sales price of “identical” houses. In other words, comparing apples to apples.
Two of the most frequently used home price indices are the Case-Shiller price index, issued by Corelogic, and the Federal Housing Finance Agency’s House Price Index, or HPI. Case-Shiller is the more popular of the two.
Based on the Case-Shiller index, the national selling price of existing homes rose 5.7% in August, moving at the fastest pace in nearly two years. In fact, the rate of home price inflation has returned to the same level as two years ago, as the chart below demonstrates.
Higher home prices are the economic response to the greater demand for homes that has been brewing since the start of the pandemic, as consumers were forced to stay home, and as many tried to move from more densely populated urban centers to suburban or rural areas. Of course, this higher demand combined with a shrinking inventory can only lead to higher prices.
Where are home prices headed?
Given the current supply/demand scenario, house prices should remain above their long-term average.
Most economists do not expect price appreciation to accelerate above the current 5.7%, though. Many renters have become homeowners recently, boosting the demand for single-family homes and condominiums. However, the financial stress caused by persistent layoffs, with 750,000 people applying for unemployment benefits, suggest that the move toward homeownership may ease in the near future, which should scale back home appreciation.
There are also regional variations to take into account. The Case-Shiller index collects house price data for 20 metropolitan areas in the U.S., with price inflation varying greatly. Over the past 12 months, they range from a low of +1.3% in the Chicago Metro area vs. last August, to a high of nearly +10% in Phoenix.
The chart above highlights metro areas with high house price inflation, like Phoenix and Seattle, or metros with dramatic changes in home prices, such as Las Vegas and San Francisco, where inflation has cooled considerably.
The gray lines in the chart reflect the path of the other 16 metro areas, where changes in home prices have been comparatively stable.
Condominium Prices
The Case-Shiller index also provides pricing trends for condominium properties for five metropolitan areas, shown in the chart below.
Similar to the situation with single-family home prices, there are also large differences in the rate of the increases. Overall, the rate of price inflation for condominiums is lower than that for single-family homes.
Pandemic regulations and social pressures to “stay home” may be influencing consumers to shy away from purchasing a condo, perhaps opting instead for single-family housing. The evidence is in sales of single-family homes, which have recently hit record levels.
