March 25, 2025

The seasonally adjusted Case Shiller Index of Home Prices in 20 cities rose 0.5% in both December and January.  Prices have `risen 4.7% in the past year.

The National Index which is a slightly broader measure of home price increases rose 0.6% in January after climbing 0.5% in December. The year-over-year increase for this series is 4.1%.

Nicholas Godec, Head of Fixed Income Tradables & Commodities at S&P Dow Jones Indices said “Home price growth continued to moderate in January, reflecting a clear two-part story across the past year,  The National Composite Index posted a 4.1% annual gain, with the bulk of appreciation—4.8%—occurring in the first half of the year. Prices declined 0.7% in the second half, as high mortgage rates and affordability constraints weighed on buyer demand and market activity.”  He added that, “Rising mortgage rates throughout the year elevated monthly payment burdens, which, combined with already high home prices, pushed affordability to multi-decade lows in many regions. This likely contributed to subdued activity in the back half of the year, with both buyers and sellers exercising caution. Inventory constraints also remain a challenge, particularly in legacy metro areas, where limited new construction continues to restrict supply.”

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

Second, mortgage rates are currently at 6.8%.  We believe that mortgage rates should decline to 6.2% by the end of 2025 as inflation slows a bit farther and the Fed is likely to cut rates once in the second half of the year.

Third, job gains and wage hikes are boosting consumer income.  Real disposable income has climbed by 1.8% in the past year.

The housing affordability index came in at 100.7 in January which means that potential buyers had 0.7% more income than was necessary to purchase a median-priced home.  With income continuing to rise slowly,  mortgage rates declining, and prices about unchanged (or declining slightly) that purchaser of a median income earning family  should have 15% more income than required to purchase that median-priced home by the end of this year.  That should put some spark back into both new and existing home sales.

After reaching a record low level, the supply of existing homes available for sale  has begun to climb and is now at 3.5 months.   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 be relatively unchanged in the months ahead.

We expect GDP to grow by 1.5% in the first quarter and 2.5% in 2025.  The ratio of consumer debt to income remains very low.   The economy keeps cranking out jobs and wages keep rising slowly which should boost consumer income and spending.  Mortgage rates are likely to fall somewhat in the months ahead.   The stock market is not far from a record high level.   The Fed could lower rates slightly in the second half of the year.

The shelter component of the CPI seems to closely track the Case Shiller change in home prices with a lag of about a year.  As a result, the shelter component of the CPI which has increased 4.2% in the past year should slow further as the year progresses to perhaps 3.7% by yearend, which should allow the core CPI to resume its slowdown.

Stephen Slifer

NumberNomics

Charleston, SC