In the latest Capital Letter, I went through (yet again) some of the sectors that are showing stress as interest rates increase, adding residential housing to a growing (and incomplete) list.
Today’s news (via US New & World Report):
Home prices decelerated in August, as the bite of higher mortgage rates and inflation weighed on the housing sector, according to the S&P CoreLogic Case-Shiller index released Tuesday.
Prices nationally rose year over year at a 13% rate, following increases of 15.6% in July…
“The forceful deceleration in U.S. housing prices that we noted a month ago continued in our report for August 2022,” said Craig J. Lazzara, managing director at S&P DJI.
“These data show clearly that the growth rate of housing prices peaked in the spring of 2022 and has been declining ever since,” he added. “On a month-over-month basis, the biggest declines occurred on the west coast, with San Francisco (-4.3%), Seattle (-3.9%), and San Diego (-2.8%) falling the most.”
“After a slowdown in July, mortgage rates resumed their upward march in August, rising from just-below 5% at the start of the month to about 5.6% by the end,” George Ratiu, senior economist at Realtor.com, said ahead of the release.
“For homebuyers, the impact of higher rates was compounded by inflation running at a four-decade high, resulting in less money in their pockets and diminished budgets,” he added. “The sharp pullback in demand was reflected in dropping sales and decelerating home prices.”
There may be a time when housing benefits from being seen as an inflation hedge (based on some past precedents), but for now, the net effect of inflation on prices continues to be negative.
US News & World Report:
Lisa Sturtevant, chief economist at Bright MLS, warned that the slowdown in prices was likely going to get worse as the year goes on.
“The August Case-Shiller index reflects single-family home sales that closed in August, meaning many of the sales included in the index were under contract earlier in the summer,” she said. “The slowdown in housing market conditions has accelerated this fall which means that home price growth is likely significantly lower than reported by the Case Shiller data.”
More color from the Wall Street Journal:
The average rate on a 30-year fixed-rate mortgage was 6.94% in the week ended Oct. 20, up from 3.09% from a year earlier, according to housing-finance agency Freddie Mac.
The median existing-home price rose 8.4% in September from a year earlier to $384,800, according to the National Association of Realtors.
The Case-Shiller 10-city index gained 12.1% over the year ended in August, compared with a 14.9% increase in July. The 20-city index rose 13.1%, after an annual gain of 16% in July. Price growth decelerated in all of the 20 cities.
Economists surveyed by The Wall Street Journal expected the 20-city index to gain 14.4%.
I’ll lazily quote myself from the Capital Letter:
So, is a U.S. housing crash on the way? Some of these negative numbers are merely a descent to earth after the pandemic-related surge in demand and prices, a fact that will be cold comfort to those who bought during that period. This would probably have been expected even without the Fed hiking rates. I cannot help wondering, however, if the decline in prices now creeping into forecasts – I saw one prediction that prices would fall three percent in 2023, for example – are too modest. A recession would be expected to knock down prices further, and sell-offs can feed on themselves.
The bigger question is whether a larger de-rating of residential real estate reflecting the end of ultra-low rates is on the way. Boldly, I’ll just declare that it’s too soon to say…