Key Takeaways:
• The Case-Shiller House Price Index reveals houses are nearly 19% more expensive than they were a year ago;
• Tight inventory of homes for sale is a key driver propelling prices;
• At current inflation rates, home prices could double in some areas in as soon as three years.
By Manuel Gutierrez, Consulting Economist to NKBA
The trend of rising house prices that began almost a year ago continued in June. The average price of a home sold in June was 18.6% higher than a year before (Figure 1, right panel,) according to Corelogic’s Case-Shiller House Price Index. At this rate, the price of an average home will nearly double in just five years.
Compared to May, prices were 1.8% higher. In fact, as the left panel of Figure 1 shows, home prices have risen at least 1% per month since August 2020.
House prices are driven partly up by the low inventory of homes for sale, which stood at 1.23 million homes in June. This is lower than the 1.5 million homes for sale a year before.
As is often well-documented, a robust housing market is associated with vibrant K&B remodeling activity, but as the costs of homes rise, some buyers are priced out of the market, making them more inclined to remodel than buy.
Other key factors driving home prices higher include Americans’ greater desire to move from renting to owning a home, especially moving from densely populated urban areas — often in multi-unit apartment buildings — to exurban, suburban and rural locations. And demand for second homes has also increased, as many consumers sought greater isolation and more space.
But the greater demand for housing does not translate equally for all types of houses. Condominium prices have almost stagnated in many areas, reflecting the weaker demand for that style of living — typically apartments in multi-unit buildings or townhome complexes.
Home prices are rising fastest in the South and West, and at current inflation rates, could double in some areas within three years.
Figure 2 shows annual price trends for condos in the five metro areas for which the Case-Shiller index is calculated. In three of those metro areas, house prices lag the overall increase in the Consumer Price Index, which was 5.4% during the same period; that is, the 12 months ended in June 2021.
There are some differences in condo price appreciation among the five metro areas. The greatest inflation is in Los Angeles, where condo prices are 12% higher than a year ago. This is twice the appreciation in Boston, and three times higher than that of Chicago, San Francisco or New York.
The charts also reveal the difference in price appreciation for condominiums and single-family homes in each metro area. Single-family house inflation by far exceeds that of condominiums in all five metros. This is good news for sellers of single-family houses, as well as for buyers of condominiums. But the correlation is that single-family home buyers are facing higher prices, and condo sellers are making less on the sales of their units.
Finally, looking at price changes for single-family houses in the 20 Case-Shiller metro areas (Figure 3 and Map 1), there are large differences among areas.
Metro areas with highest home price inflation, such as Phoenix (29%) and San Diego (27%), have house values that could nearly double in just three years if price inflation continues at these current rates.
The prices in the top three metros are nearly double those of the bottom three, which happen to be in the Midwest: Cleveland, 15%; Minneapolis, 14%, and Chicago, 13%.
The geographic concentration of house-price inflation is clearly seen in Map 1. Metro areas with fastest rising house prices are located mostly in the South and West.
Conversely, areas with below-average price appreciation are found mostly in the Midwest and Northeast. The only exception is Atlanta, which posted a 16.6% price rise over a year ago, two points below the 18.6% national average.
