November 29, 2022

The Case Shiller Index of Home Prices in 20 cities fell 1.2% in September after falling 1.3% in August and 0.8%  in July.  This is the third monthly decline in this series.  After a long period of rising rapidly, prices have begun to fall and they should continue to decline for many months to come.  Over the past year home prices have risen 10.5% which is a lot slower than the steady diet of 20% increases we were seeing earlier in the year.

A broader index  for the entire U.S. — which would include a large number of smaller cities — fell by 0.8% in September after declining 0.9% in August and 0.5% in July.   For the year as a whole this series has risen 10.7%.   We expect this index of home prices to steadily decline as the year progresses with monthly drops of 1.0-1.5% through the end of the year.  For the year as a whole we look for a 3.6% increase..

Craig J. Lazzara, Managing Director at S&P said, “As the Federal Reserve continues to move interest rates higher, mortgage financing continues to be more expensive and housing becomes less affordable. Given the continuing prospects for a challenging macroeconomic environment, home prices may well continue to weaken.”

What about housing affordability?  There are three pieces to this equation.  First, as noted above, home prices have begun to fall and we expect them to decline each month as the year progresses.

Second, mortgage rates climbed from 3.0% at the end of last year to 6.5% currently.  We look for mortgage rates to peak at roughly 7.9% in the middle of next year as the inflation rate remains higher than is expected currently.

Third, job gains and wage hikes are boosting consumer income.  With the housing affordability index at 97 in September potential buyers had 3% less income than was necessary to purchase a median-priced home.  Mortgage rates should rise slowly through the middle of next year.  But home prices will steadily decline and consumer income should rise.    We suspect that by yearend 2023 that the affordability index will have risen slightly to about 110% which means that potential buyers will have slightly more than enough money to purchase a median-priced home.

Potential buyers at the low end of the market — typically first time home buyers — are the ones primarily getting priced out today.  Higher down payments and rising monthly payments are causing potential buyers for homes priced at or below $300,000 to defer their purchase.  Home sales are falling across the board, but lower income earning families are getting hit the hardest.  However, as home prices fall steadily for the foreseeable future these down payments and monthly payments will decline and make housing more affordable.

The supply of existing homes available for sale is still very low.   At 3.3 months the supply of homes on the market is about one-half of the 6.0 month supply required to balance supply and demand.  Contrast that with the roughly 10-11 month supply available during the so-called “Great Recession” in 2008-09.  With so many homes on the market at that time, home prices fell rapidly.  Reduced supply today will prevent prices from falling more rapidly.

We expect 1.0% GDP growth for 2023.  .  Businesses are still hiring as rapidly as they can.  The ratio of consumer debt to income is near a record low level.  And while interest rates should rise steadily through the spring of next year, real rates will remain sharply negative until mid-2023.  Hence, interest rates will not be high enough to be a significant brake on the economy at least through the middle of next year.

Stephen Slifer


Charleston, SC