November 24, 2020
The Case Shiller Index of Home Prices in 20 cities rose 1.3% in September after climbing 1.2% in August and 1.3% in July. Over the past year home prices have risen 6.0%.
A broader index for the entire U.S. — which would include a large number of smaller cities — is rising at a somewhat more rapid 7.0% pace. But in the past three months this series has been climbing at a more disturbing 13.6% pace.
Home sales took a big hit in March and April. But sales came roaring back in the subsequent six months With little supply on the market home prices have been rising. Builders need to find enough bodies to significantly boost the pace of production in the months ahead or else home prices will continue to climb.
While prices are rising more quickly, mortgage rates are at a record low level of 2.8%, and consumer income is growing. As a result, housing remains affordable with the index of housing affordability at 159. This means that potential buyers have 59% more income than is necessary to purchase a median-priced home. At the peak of the housing boom in 2006 consumers had just 14% more income than necessary. Housing was very expensive then. That is not the case now.
Q2 GDP declined 31.4%. But the fiscal stimulus propelled Q3 GDP growth to 33.1% and we expect Q4 GDP growth of 10.0%. While the virus is spreading more rapidly, American consumers continue to spend at a vigorous pace, and businesses continue to hire lots of bodies every month. We do not seem to care.