January prices increased over 11% YOY, the largest percentage gain in nearly 20 years.
By Manuel Gutierrez, Consulting Economist to NKBA
Home prices continue to hit record highs. The Case-Shiller house price index, which tracks the movement of house prices across the nation, was 11.2% higher in January than for the previous year.
Figure 1 shows the rising trend in house prices since the middle of last year. Increases have accelerated during that period, driven by heavy consumer demand. The pandemic was an impetus for many consumers to move from congested apartments to their own house, and others to purchase primary or second homes away from central cities.
This increased demand for housing, combined with a dwindling supply of homes for sale, has put pressure on house prices.
January’s 11% YOY home price increase is the highest in nearly two decades.
House price inflation is approaching historically high levels not seen since the 12% spike of the period from 2002 to 2004. In the early 2000’s, the Federal Reserve Bank kept interest rates at extremely low levels to boost the economy.
Additionally, during that time the government pushed policies to encourage home buying, allowing many consumers to purchase homes with little or no down payment, with the expectation that house prices would continue to rise. This included lending to consumers with low credit scores, leading to the issuance of so-called “sub-prime” loans.
At the time, many renowned economists believed that house prices would never fall on a national level, since they had never done so previously. The reality, however, was quite different. Figure 2 shows the historical trend in house prices back to 1990, when the Case-Shiller index was first formed.
The dramatic drop in the rate of house price inflation between 2006 and 2009 is clear evidence that under certain conditions, home prices can fall as rapidly as they increase.
Somewhat disconcerting is that current house price inflation of 11.2% is approaching the peak reached nearly 20 years ago.
One key difference between then and now is that even though both periods benefitted from extremely low interest rates, today’s home buyers pose very low credit risks. Banks and lending institutions now follow stricter rules in mortgage loans, with buyers required to meet minimum income levels to support purchases.
The 11.2% increase in house prices nationally is not equally evident across the nation. House prices at city or metropolitan levels have moved at widely different rates. Last year, the Case-Shiller metropolitan area index ranged from a low of 9%, in Chicago and Las Vegas, to a high of 14% in Seattle and San Diego. The price index for some of those metro areas is shown in Map 1, which folds the city house-price changes onto changes at the state level. The house-price data for states is obtained from the Federal Housing Finance Agency.
Condominium Prices
The Case-Shiller index also compiles house-price data for condominiums sold in a given month. However, since there are fewer condominiums sold in most areas, the index is calculated for only five large metro areas. These areas have a sufficiently large enough number of transactions each month, and thus a price index can be calculated reliably from month to month.
Figure 3 shows the trends in annual price increases for each of the five metro areas over the last two years.
One observation is that the price increases for condominiums are smaller than for single-family homes. House-price increases for single-family homes, shown in Map 1 above, range from 9% to 14% over the last year. In comparison, condominium price increases range from a high of rising 5.4% in Los Angeles, to a decrease of 1.2% in San Francisco.
The second point is that condominium prices tend to fluctuate sharply from month to month. Condo prices in Boston, for instance, rose almost 5% in January 2019, moderated to 3% at the beginning of 2020, then reversed to show an increase of 5.4% this year.
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