When will House Price Growth Slow?
The Case-Shiller National Index will probably show record year-over-year growth in April
Most analysts expect house price growth to slow sharply in coming months. For example, a few weeks ago, I wrote: What will Happen with House Prices?
However, the most recent Case-Shiller report showed house prices were up a record 20.6% year-over-year (YoY). This report was for March (a three-month average of January, February and March prices).
And, according to Zillow research, house prices will be up even more YoY in the April Case-Shiller National Index (to be released on June 28th. The Zillow forecast is for the YoY change for the Case-Shiller National index to be a record 20.8% in April. From Zillow:
“Annual home price growth as reported by Case-Shiller are expected to accelerate in the national and 10-city indices and slow slightly in the 20-city index.”
Why are prices still up sharply year-over-year?
First, although inventory is now increasing year-over-year, active inventory levels are still very low. And there is a clear relationship between supply and house price growth. In March, the months-of-supply was at 1.9 months, and the Case-Shiller National Index (SA) increased 2.09% month-over-month. The black arrow points to the March 2022 dot. In the April existing home sales report, the NAR reported months-of-supply increased to 2.2 months.
Second, timing. The various measures of house prices use closed sales of existing homes. For March house prices, most of the contracts were signed in January and February, before the recent sharp increase in mortgage rates. Also, the Case-Shiller index is a three-month average, so “March” included sales in January and February (and many of those January contracts were signed last November). That is a significant lag in the data.
The Census Bureau recently reported New Home sales declined sharply in April. And homebuilders are reporting softer sales in May. From Rick Palacios Jr., Director of Research at John Burns Real Estate Consulting:
Important Difference in Timing Between New and Existing Home Sales
New home sales are reported when the contract is signed, whereas existing home sales are reported when the purchase closes. House prices are based on closed sales (the FHFA also includes refinance appraisals).
It appears higher mortgage rates started impacting new home sales in April and May. If the higher rates also impacted existing home sales in April and May, when will that show up in the Case-Shiller index?
Contracts signed in April would likely close in May or June, and contracts signed in May would likely close in June or July. The Case-Shiller report for “June” (a three-month average of April, May and June prices) will be reported in late August.
So, there will be a long lag between what is happening today, and when it will be reported.
More Timely Report
Perhaps the timeliest house price report is the monthly existing home sales report from the National Association of Realtors® (NAR). Each month the NAR reports the median prices for closed sales. Note: Median prices are distorted by the mix (repeat sales indexes like Case-Shiller and FHFA are probably better for measuring prices).
Here is a graph comparing the YoY change in the NAR median prices vs the Case-Shiller National Index:
The YoY change in the median price peaked at 23.6% in May and slowed to 12.6% in October (still very strong increase in prices). But then picked up a little again, and the YoY increase in April was similar to the YoY increase in March.
But even the median price is lagged. For example, the May report (to be released later this month), will be for contracts signed mostly in March and April. We might see some slowdown in new home prices first - since those are reported when the contract is signed. But new home prices (average and median) are also distorted by the mix, and there have been some recent reports that the high end is holding up better than the low end of the housing market.
The bottom line is we have to be patient waiting to see the impact on house prices due to the significant data lags.
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