May’s 2.1% gain is slightly below the previous month, but annually, it’s the highest ever year-over-year, at +16.6%.
By Manuel Gutierrez, Consulting Economist to NKBA
The latest data on house prices shows the upward trend continuing — and it appears to have no limit. The 2.1% price increase in May is slightly below April’s 2.3% (Figure 1, left panel), but the pace of monthly increases has been accelerating since February.
On an annual basis, home price increases hit an all-time historical record of 16.6% for that month. Not even during the early 2000 housing boom, when sub-prime mortgages dramatically increased the pool of home buyers, did home prices appreciate at such levels. In fact, the highest previous annual increase was 14.5%, recorded in September 2005.
The rising pace is clearly evident in the staircase pattern in the right panel of Figure 1. Annual increases have been higher each consecutive month since the 4.4% gain in June 2020. It has been rising 1% faster each month.
These trends do not portend a housing bubble, as some pundits are contending.
One factor that may allay such fears is the relative stability of condominium prices. If the nation was in the middle of an unsustainable bubble, prices for all types of housing would be rising, not just single-family homes. Shortages of single-family homes continue to hover near record levels, which makes house-price inflation understandable.
Home prices in May are up an annualized 16.6%, an all-time record easily surpassing the previous record of 14.5% from September 2005.
The Case-Shiller index, the most common measure for house-price inflation, confirms that condominium prices are rising significantly slower than that of single-family homes. Figure 2 illustrates housing-price trends for five metropolitan areas over the last two years.
These are the areas with a sufficiently large enough number of condominium sales for any month — allowing for a reliable calculation of price changes.
Each panel in the chart displays the annual price increases for single-family houses and condominium units.
Annual increases in single-family prices are several times larger than those of condominiums in virtually all metro areas. The gap is smaller, however, in Los Angeles, where prices for single-family homes are 17% higher this year, against a 10% hike for condos.
Single-family house prices at the national level reflect what is happening in metro areas. Figure 3 displays the annual price increase for 19 of the metro areas for which Case-Shiller calculates house prices.
Leading the group with the highest increase is Phoenix, with a staggering jump of 29% in May over a year ago. It has led all other metro areas with the highest annual price increases since late 2018. The Phoenix area is one of the fastest-growing in population, which has driven demand for homes. On top of it — and typical of the situation faced throughout the nation — that metro area has suffered from a shortage of homes, the ideal recipe for sharp price spikes.
San Diego is second to Phoenix, with prices rising 25% over the last year, followed closely by Seattle, at 23%.
Not all metros are created equal, however, and there’s a fairly wide difference in the rate of price gains. The annual increase in Phoenix is more than two-and-a-half times greater than that of Chicago, at 11%.
Other areas with house prices rising relatively modestly, displayed near the bottom of the chart, are Minneapolis and Cleveland, with gains of 13% and 14%, respectively.
So how long will the trend in rising home prices continue? As long as mortgage rates remain at their current historical lows and the shortage of homes is relatively unchanged, upward price pressure should continue. Still, consumer sentiment recognizes that it can’t continue indefinitely, with more homeowners indicating it is a good time to sell — and when inventories become more robust, prices might ease. Another potential driver to cool the market would be a reversal in the Federal Reserve Bank’s policy stance, which would translate into higher interest rates. However, those increases are likely to be gradual and are not expected to cause big shocks to the housing market.
