Average prices for new and existing homes are up by double-digits over last year.

By Manuel Gutierrez, Consulting Economist to NKBA

Talk about a seller’s market. The average price of a new single-family home in April was $345,000 — 16% above last year — and the average price of existing homes was $365,000, a spike of 13.6%.

There are several ways in which house prices and price changes are measured. Typically, they are obtained when home sales data are released, either for new or existing homes.

These increases, however, don’t capture the underlying inflation of homes. This is because factors like location influence the average price. If, in a given month, more houses are sold in the West than during the previous month, the overall average would automatically increase, since homes in the West sell at a significant premium to other regions. In fact, the price of existing homes sold in the West in April was 33% higher than the national average. Other factors that impact the increase in home prices are size of the house, the type of structure, amenities and how that mix plays out during a given month.

New single-family homes sold for $435,000 in April — 16% higher than the prior year —while condominium sales lagged badly.

A better way to gauge the real change in house prices is to use an index, such as the Case-Shiller index issued by Corelogic, or one issued by the Federal Housing Finance Agency. These indexes attempt to remove the influence of extraneous factors mentioned earlier by comparing the selling price of the same home over time.

Based on Case-Shiller, the price of a single-family home in March rose by 1.5% for the month (Figure 1.) This increase, although higher than that of the preceding four months, matches a similar jump in October 2020.

While home prices rose rapidly between April and October of last year, the pace of price changes has stabilized over the last six months. The range for that period was between 1.2% and 1.5%.

On an annual basis, March home prices were 13.2% above the same month last year. This is on top of a 12% gain the prior month. The right panel of Figure 1 clearly shows the rapid acceleration since the middle of last year. Month after month, the annual increase in house prices was greater than that of the previous month.

Furthermore, the recent fast pace of home-price increases, driven by strong demand for houses combined with a diminishing supply of homes for sale, is rapidly approaching the price inflation that we last saw just before the 2007-09 economic recession (Figure 2.)

Several factors need to be considered when comparing the two periods.

First, the price increases earlier this century peaked over a long period of time. Starting from the long-term average of 3.8% in 1998, marked by the red dashed line, it took eight years to reach the high point of 14.3% in May 2005.

In sharp contrast, in the current situation, it has taken slightly over a year to experience similar price acceleration.

The second point, and this is key, is that unlike consumers who purchased homes before the 2006-2009 housing crash, the vast majority of today’s buyers can actually afford the payments. Their credit ratings are on much more solid ground, and the practices used by banks and other lenders in the earlier period no longer exist. Also, many if not most are purchasing the homes for their own use, rather than speculating on the potential profit resulting from price increases.

Condo Prices Stagnate

House prices for condominium units are available for only five metropolitan areas, those with a sufficiently large enough number of sales to enable Case-Shiller to calculate an index. They are listed in Figure 3 and show that condo house-price acceleration is minimal. In fact, only in the Los Angeles metropolitan area have condo prices increased steadily over the last year. Even there, however, prices are just 6.6% above last year, which is half the national average price increase for single-family homes.

The pandemic and subsequent economic shutdown induced many consumers to shy away from living in multiple dwellings or close quarters, which are typified by rental and condominium units. This led to the price of condos in New York barely increasing over last year, while in San Francisco, they actually fell.

Finally, there are great differences in home-price increases among metropolitan areas. Figure 4 displays those metro areas which have house price inflation data available.

They are rising fastest in western cities like Phoenix, San Diego and Seattle, all with increases hovering around 20% over the last year.

At the low end, Chicago rose by just 9% for the year, and several other cities, including Las Vegas and Minneapolis, appreciated by about 11% from last year.

For a review of Monday’s Economic Indicators, on job creation in the month of May, click here.

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