August 27, 2024
The seasonally adjusted Case Shiller Index of Home Prices in 20 cities rose 0.4% in June after climbing 0.4% in May. It has risen 6.4% in the past year.
Brian Luke, Head of Commodities, Real &P Digital Assets said, “The S&P CoreLogic Case-Shiller Indices continue to show above-trend real price performance when accounting for inflation. Home prices and inflation continue to factor into the political agenda coming into the election season. While both housing and inflation have slowed, the gap between the two is larger than historical norms, with our National Index averaging 2.8% more than the Consumer Price Index. That is a full percentage point above the 50-year average. Before accounting for inflation, home prices have risen over 1,100 percent since 1974, but have slightly more than doubled (111%) after accounting for inflation.
Luke added that, “Another popular theme is making housing more affordable to first-time homebuyers. We compared each of the 16 markets that the S&P CoreLogic Case-Shiller Home Price Indices calculate on a tiered basis to evaluate historical performance of more affordable homes. Our tiered indices divide each market into three price tiers, which range based on the market. Looking at the last five years, 75% of the markets covered show low-price tiers rising faster than the overall market,”
The National Index which is a slightly broader measure of home price increases rose 0.4% in June after rising 0.3% in May. The year-over-year increase for this series is 5.4%.
What about housing affordability? There are three pieces to this equation. First, as noted above, home prices should continue to rise but at a slower rate in the second half of the year.
Second, mortgage rates are currently at 6.5%. We believe that mortgage rates should decline to about 5.4% by the end of 2024 as inflation continues to subside.
Third, job gains and wage hikes are boosting consumer income although inflation is eroding the nominal increase in income. Real disposable income has been slowing in recent months and has risen just 1.0% in the past year.
The housing affordability index came in at 93.3 in June which means that potential buyers had 6.7% less income than was necessary to purchase a median-priced home. With income continuing to rise slowly, mortgage rates declining, and prices rising slowly, housing affordability should increase somewhat in 2024 which should put some spark 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 now at 4.0 months is the highest it has been in four years. 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 rise more slowly later this year.
We expect 0.9% GDP growth in the third quarter followed by 1.6% in the fourth quarter of the year. 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 at a record high level. The Fed will initiate an easing cycle next month which will continue for more than a 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 5.0% in the past year should slow further as the year progresses, which should allow the core CPI to resume its slowdown.
Stephen Slifer
NumberNomics
Charleston, SC
Steve – To what extent do the accelerating housing prices affect overall inflation?
Hi Frank,
Home prices are an asset and are treated as a capital investment. So we cannot look at housing prices and easily figure out what is happening to inflation. The CPI is a measure of inflation and what goes into the CPI is a measure of rent. In fact, rents are about 1/3 of the entire CPI. If rents are on the rise, that feeds directly into that measure of inflation.
The Census Bureau does a quarterly survey on homeownership. Amongst the many things they report are “Asking Rent — Vacant Rentals”. I cannot show you the chart using WordPress so I will send it your e-mail address. In the four-quarter period ending in the third quarter rents had risen 15.8%. But yet in the CPI rents have risen just 1.9%. But remember that in the CPI they knock on doors and ask people how much their rent is, and they survey the same unit every six months. So given that method of calculation rapid rent increases may take a while to get captured.
Bottom line is, rents are going up. But expect them to rise more slowly than the rapid increases in home prices. If they have risen 1.9% in the most recent 12-month period they should be higher — 2.5% perhaps — in 2021.
Hope this helps.
Steve