January 30, 2024

The seasonally adjusted Case Shiller Index of Home Prices in 20 cities rose 0.1% in November after climbing 0.6% in October.  The rate of increase in home prices has slowed from double-digit gains ib 2021 and 2022 to 5.4% currently.  But the most recent Case Shiller data are for November.  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, “November’s year-over-year gain saw the largest growth in U.S. home prices in 2023, with our National Composite rising 5.1% and the 10-city index rising 6.2%. Detroit held its position as the best performing market for the third month in a row, accelerating to an 8.2% gain. San Diego notched an 8% annual gain, retaining its second spot in the nation. Barring a late surge from another market, those cities will vie for the ‘housing market of the year’ as the best performing city in our composite.”

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 and, in our opinion, are likely to decline in the months ahead.

We expect this index of 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 7.6% a few months ago to 6.6% 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 94.2 in November which means that potential buyers had  5.8% less 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.   This shortage of homes available for realtors to sell is going to prevent home prices from falling very much

We expect 1.5% 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 sharply and likely to fall farther in the months ahead.   The stock market is at a record high level.  Consumer sentiment has surged in the past two months.  The Fed will initiate an easing cycle later this year, probably some time in the summer.

Stephen Slifer

NumberNomics

Charleston, SC