Home Prices Continue Record Setting Trend
The S&P Core Logic Case-Schiller Index was released yesterday which provides housing price trend data for December 2023. ?The release of yesterday’s report confirmed the continuation of record setting home price growth with the national index reporting a 5.5% year over year increase, up from 5.0% in the previous month.? This extends the annual price growth trend to 7 consecutive months, all of which occurred during a period where buyers have experienced the highest financing costs in decades.
The 10 and 20 city indices confirm not only record setting price growth but an acceleration in the growth rate with the price gains increasing to 6.1% and 7.0% from 5.4% and 6.3%.
All major markets reported an annual price increase with Portland ending an 11-month trend of price declines.? ?San Diego posted a blistering 8.8% increase, the sharpest price gain in the index with Detroit and Los Angelos splitting second place at 8.0% annual growth.
Detroit splitting second place extends the trend of midwestern markets sharing the spotlight.?
Historically the warmer and sunnier regions would be seen at the top of chart as is the case with San Diego and Los Angelos.? The midwestern markets are known for attracting out of market demand, specifically from real estate investors seeking larger profit margins relative to competing markets.? With the sharp increase of property insurance experienced by the coastal markets over the past two years, the midwestern markets offer comparatively more value for home buyers comfortable with the region.
While the annual index once again confirms the resiliency of home prices, the effect of multi-decade high borrowing costs made an impact at year end.? On a month over month basis all 3 indices reported price declines with the National index fading by .37, the 20 city and 10 city indices decreasing by .2 and .3.
Is the slowing growth, on a monthly basis, a sign of larger, more broadly felt correction on the horizon?? No!
Mortgage rates offered to buyers in Q4 were the highest on record in over 20 years, at times topping 8%.? Couple the sharply heightened borrowing costs with the seasonal holiday effect and moderate slowing in price growth, on a monthly basis, is to be expected.
? While it is difficult to determine if the blistering appreciation in home price growth will moderate, one can be certain that fears of a systemic collapse or a replay of the 2008 crash are unfounded.? The current price growth has been realized during a time when affordability remains at an all-time low.? With each subsequent price increase the share of would-be buyers falling short of qualifying continues to rise.? This is the result of wage growth failing to match pace, even modestly, with the increasing cost of home ownership.? The market continues to experience price growth despite the limited pool of qualified buyers as the limited supply, caused by a lack of motivated sellers, maintains upward pressure on the price equilibrium.? As always, the relationship between demand and supply determines the prevailing price.?
?Buyers holding out to purchase with an expectation of lower prices in the future will certainly prove to be a costly mistake at best.?
At worst, those falling short of the qualification threshold may forgo their opportunity at home ownership until a time when they can substantially increase their earning ability.?
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? With inflationary pressures fading and economic indicators moving closer to the Federal Reserve’s targets metrics, the likelihood for lower rates in the near term continues to increase.? While the Fed does not directly control or set mortgage rates, mortgages rates have historically moved in tandem with the Federal Funds Target Rate or Prime Rate as seen by consumers.
? Relief in high borrowing costs provided by the decrease in mortgage rates will increase the pool of qualified buyers, increasing the demand side of the price equation.? The expected increase in buyer demand entering a supply restricted market means prices are expected to continue upward in correlation with the rate reductions.?
?The speed at which mortgage rates decrease will prove to be a critical factor in price acceleration.?
A slow and gradual reduction in borrowing costs will allow the market supply to largely absorb the increasing demand, however a sharp drop similar to what the market experienced during the COVID years has the potential to send prices shooting upward, an outcome hard to imagine after the historically high growth experienced in the past 4 years.
?Are we as a country approaching a turning point in the expectation of home ownership by those in the middle class?
Michael Bardy
Real Estate Finance Professional | MacroEconomist
Insightful analysis on the S&P Case Schiller Home Price Index; the forward-looking projections are particularly useful for understanding potential market trends.