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Home Prices Continue to Grow

July 3, 2017

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Bloomberg had an odd take on the latest S&P/Case-Shiller Home Price Index. It called the year-over-year price gains for April a “disappointment.” How disappointing was the April reading? Home prices in the 20-city metropolitan index were up 5.7%.

Case-Shiller showed year-over-year price gains at 6% in the previous two months, but 5.7% is still strong growth. We hardly view it as disappointing. 

Home prices continue to show real gains when you consider that consumer-price inflation runs at less than 2% annually. So in real terms, we’re looking at real gains of up to 4%. To be sure, consumer-price inflation could be running higher than 2% in many of the cities Case-Shiller follows. At the same time, home prices could be running at a higher rate than the aggregated index number Case-Shiller offers. 

For example, Seattle could be experiencing consumer-price inflation double the national average, but if you’re a Seattle homeowner, you’re likely sitting in high cotton. Home prices are up 12.9% in the Seattle metropolitan area over the past year. Your home is putting additional distance between the asset side and liability side of your balance sheet. 

When home prices rise relentlessly, as they have in many markets for the past five years, is it still worth buying a home?

Prior to the 2007-2008 meltdown in financial markets and home prices, the consensus opinion was to buy no matter what. Get in the game, because home prices had always trended higher. There had not been a meaningful broad-based market correction since the Great Depreciation. Home prices had trended higher for 70 years. 

The problem with this blanket advice is that home prices are determined in local markets. The national numbers — which we frequently report (like Case-Shiller) — can continually trend higher. This doesn’t mean, though, that the price trend holds for any local market. In any local market, prices could easily ebb and flow, even if the national number continually flows (trends higher). Yes, Case-Shiller can continually trend higher, but that doesn’t mean any local market must follow suit. 

Back in 2009/2010/2011, few people were pounding the table harder than we were. So many homes in so many local markets were screaming values. With the Federal Reserve determined to inject enough liquidity to elevate prices, we felt assured a recovery was on its way and that it would occur sooner than later. Such has been the case.

At this point, we see a fairly valued market at the national level. At a more micro level, some local markets are overvalued, some are undervalued.

As opposed to Bloomberg, though, we wouldn’t be disappointed if home-price appreciation decelerated at the national level.  For one, we think a deceleration in price appreciation would draw in more supply and more demand. Both sides would feel less compelled to hold out. Secondly, it would temper talk about another housing bubble, which we don’t think we are in, though we have heard more talk of lately.

Will Weak Sales Lead Us Into Summer? 

An odd spring could portend an odd summer. 

Home sales during the spring months generally underwhelmed most market watchers. The good news is that we saw an uptick in May sales. The bad news is that the latest pending home sales data suggest a trend might be hard to sustain. The Pending Home Sales Index dropped for a third-consecutive month in May.  

What were the issues impeding contract signings? The usual — falling inventory and rising home prices. 

Rising mortgage rates in recent weeks may or may not help the sales cause. Over the past couple weeks, rates have been on the rise. The yield on the 10-Year U.S. Treasury note is at a two-week high, and so are quotes on many mortgage offerings. It appears that long-term rates are on the rise on news that the European Central Bank could follow the Federal Reserve’s lead and move to raise interest rates. 

The prospect of rising mortgage rates could get people to act: Buy now or risk paying more later. Or it could motivate potential buyers to hunker in on the sidelines. Our instincts suggest that we could see more of the latter than the former. Recent application activity backs our contention.

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