March 26, 2024

The seasonally adjusted Case Shiller Index of Home Prices in 20 cities rose 0.1% in January after rising 0.3% in December.  The rate of increase in home prices has slowed from double-digit gains in 2021 and 2022 to 6.6% currently.  But the most recent Case Shiller data are for January.  Other data on new and existing home sales have been declining in recent months so it seems likely that these data will also decline in coming months.

Brian D. Luke, Head of Commodities, Real & Digital Assets at S&P DJI said, “U.S. home prices continued their drive higher.  Our National Composite rose by 6.0% in January, the fastest annual rate since 2022. Stronger gains came from our 10- and 20-City Composite indices, rising 7.4% and 6.6%, respectively. For the second consecutive month, all cities reported increases in annual prices, with San Diego surging 11.2%. On a seasonal adjusted basis, home prices have continued to break through previous all-time highs set last year.”

We think that Luke is not providing an accurate picture of the housing market.  Yes, year-over-year price gains remain sizeable, but clearly the monthly gains have slowed.   In the past three months the national index has risen at a 2.5% pace.  The rate of increase in home prices has slowed considerably and that will become evident in the months ahead.

We expect this index of national home prices to rise 0.2% on a monthly basis for the foreseeable future and then decline somewhat in the second half of the year.

What about housing affordability?  There are three pieces to this equation.  First, as noted above, home prices should  be relatively unchanged in the months ahead.

Second, mortgage rates have fallen from a high of 7.8% a few months ago to 6.8% currently.  We believe that mortgage rates should decline to about 6.25% by the end of 2024 as inflation continues to subside.

Third, job gains and wage hikes are boosting consumer income.

The housing affordability index came in at 105.3 in January which means that potential buyers had  5.3% more income than was necessary to purchase a median-priced home.  With income continuing to rise, and with mortgage rates declining and prices roughly  unchanged , housing affordability should increase substantially in 2024 which should put some spark into both new and existing home sales.

The supply of existing homes available for sale is near a record low level.   However, as builders step up the pace of production the supply of available homes should increase somewhat as the year progresses.  If that is the case, home prices should begin to fall somewhat later this year.

We expect 2.2%GDP growth in  both the first and second quarters.  The ratio of consumer debt to income remains very low.   The economy keeps cranking out jobs and wages keep rising which should boost consumer income and spending.  Mortgage rates have fallen somewhat and likely to fall further in the months ahead.   The stock market is at a record high level.  Consumer sentiment has climbed in the past several months.  The Fed will initiate an easing cycle later this year, probably some time in the summer.

Stephen Slifer

NumberNomics

Charleston, SC