Key Takeaways:
- Recent monthly price increases have surpassed the sub-prime heyday of 2008 and are the highest since the data calculation started in 1987;
- Latest gains are equivalent to an annual increase of nearly 20%;
- The average American homeowner’s wealth has grown by more than 19% during that period;
- Regionally, western markets like Phoenix and San Diego continue to register the highest home appreciation.
By Manuel Gutierrez, Consulting Economist to NKBA
Single-family home-price inflation eased a bit in July, with an increase of just 1.5% from June, according to the Case-Shiller House Price Index. Despite the smaller gain, the July uptick keeps home prices near historical records (Figure 1).
These data have been calculated for more than three decades, since 1987, and never have there been monthly price increases of this magnitude.
Even in the heyday of the housing boom in the early years of this century, which was fed by subprime mortgage lending, house prices rarely rose more than 1.1% in a given month.
The latest gains translate into nearly a 20% increase over the last year, shown by the 19.7% figure in the right panel of Figure 1.
Hefty price increases in such a short time frame naturally shut out many potential purchasers from owning a home, particularly young buyers who may want to move from a rental situation to purchase their first home.
On the other hand, economists observe that current homeowners benefit from rising house prices, whether they are interested in selling their home or not. Depending on the local appraisal and real estate tax regulations, the value of their homes will increase on a commensurate level to the price increase of similar homes in the area. The overall wealth of homeowners grows accordingly, at least on paper.
The Federal Reserve Bank estimates that total household wealth rose by more than 19% in the 12 months that ended in Q2 2021.
The Federal Reserve Bank estimates that household total wealth rose by $23.2 trillion over the 12-month period that ended in the second quarter. That’s equivalent to a 19.2% increase for the year. Gains in home values or household real estate wealth contributed $3.6 trillion, or 16%, of the total wealth gain.
The 19.7% change in U.S. home prices over the last year is an average at the local level. After all, real estate is a local phenomenon. Figure 2 delves into specifics by market. Increases over those 12 months range from a high of 32% in Phoenix and 29% in San Diego to more moderate increase in the mid-teens in Chicago and Minneapolis, although in most years, price increases of 13% to 15% would be considered substantial.
Many of the hottest housing markets are in the Western part of the nation, as has been the pattern for quite a while, with the top three markets all in that region. The seven markets with the lowest price increases are all either in the Eastern or Midwestern regions.
House-price gains discussed above refer to single-family houses only. However, the Case-Shiller index also calculates prices of condominiums, although the data are restricted to only the five metro areas shown in Figure 3.
Selling prices for the two types of houses, single-family and condominiums, are shown for each of the five metro areas. Condo price changes lag far behind those of single-family homes in all five areas. In fact, the increase in single-family prices is at least double that of condos in four of the five metros.
Only in the Los Angeles area do condo price increases approach those of single-family homes. However, the condo price increase is still six percentage points lower than the increase for single-family homes.
The slower pace of increases in condo prices reflects the lower desirability for communal living among consumers. The potential for COVID-19 infection owing to dense living quarters has driven many living in condos to seek shelter in single-family homes.
Note that in all the graphs of Figure 3, which show data for the last two years, the price increases prior to April 2020 were very modest. Additionally, price changes for single-family houses and condos were rising in tandem, as seen in the graph. This pattern changed dramatically after May 2020, when the two lines began to diverge.
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