CALCULATEDRISK
By Bill McBride
Yesterday, in Part 1: Current State of the Housing Market; Overview for mid-December I reviewed home inventory and sales.
House Prices
The Case-Shiller National Index increased 3.9% year-over-year in September and will likely be even more positive YoY in October (based on other data).
The MoM increase in the seasonally adjusted Case-Shiller National Index was at 0.65%. This was the eighth consecutive MoM increase following seven straight MoM decreases.
A key question I discussed in July is Will house prices decline further later this year? I will revisit this question soon.
Other measures of house prices suggest prices will be up further YoY in the October Case-Shiller index. The NAR reported median prices were up 3.4% YoY in October, up from 2.4% YoY in September. ICE / Black Knight reported prices were up 4.6% YoY in October, up from 4.2% YoY in September to new all-time highs, and Freddie Mac reported house prices were up 6.0% YoY in October, up from 5.1% YoY in September – and also to new all-time highs.
Here is a comparison of year-over-year change in the FMHPI, median house prices from the NAR, and the Case-Shiller National index.
The FMHPI and the NAR median prices appear to be leading indicators for Case-Shiller. Based on recent monthly data, and the FMHPI, the YoY change in the Case-Shiller index will increase further in the report for October.
In real terms, the Case-Shiller National index is down 3.0% from the peak, seasonally adjusted. Historically it takes a number of years for real prices to return to the previous peak.
30-Year Mortgage Rates Have Declined, but Remain Above 7%
The following graph from MortgageNewsDaily.com shows mortgage rates since January 1, 2010. 30-year mortgage rates were at 7.09% on December 12th, down from just over 8% on October 19th – the highest 30-year fixed rate in 23 years. A year ago, 30-year mortgage rates were at 6.28%, and two years ago rates were at 3.17%.
A year ago, the payment on a $500,000 house, with a 20% down payment and 6.28% 30-year mortgage rates, would be around $2,471 for principal and interest. The monthly payment for the same house, with house prices up 3.9% YoY and mortgage rates at 7.09%, would be $2,792 – an increase of 13%.
However, if we compare to two years ago, there is huge difference in monthly payments. In December 2021, the payment on a $500,000 house, with a 20% down payment and 3.17% 30-year mortgage rates, would be around $1,728 for principal and interest. The monthly payment for the same house, with house prices up 15.1% over two years and mortgage rates at 7.09%, would be $3,091 – an increase of 79%!
The decline in mortgage rates has led to a small pickup in mortgage application activity. Here is a graph showing the MBA mortgage purchase index released this morning. Purchase application activity is up from the lows in late October and early November, but still below the lowest levels during the housing bust.
And the next graph shows the refinance index since 1990. Refinance activity has increased recently, but you have to squint to see the increase!
Asking Rents Decline Year-over-year
Tracking rents is important for understanding the dynamics of the housing market. For example, the sharp increase in rents helped me deduce that there was a surge in household formation in 2021 (See from September 2021: Household Formation Drives Housing Demand). This has been confirmed (mostly due to work-from-home), and also led to the supposition that household formation would slow sharply now (mostly confirmed) and that asking rents might decrease in 2023 on a year-over-year basis.
Here is a graph of the year-over-year (YoY) change for several rent measures since January 2015. Most of these measures are through October 2023, except CoreLogic is through September and Apartment List is through November 2023.
Asking rents are down slightly YoY, and with new supply coming on the market, we will likely see further softness in asking rents.
Yesterday, the BLS noted in the CPI report: “The index for shelter continued to rise in November …”
This is important for housing and also for monetary policy. Fed Chair Powell mentioned he was watching services less rent of shelter earlier this year when this measure was up 7.6% year-over-year. This has fallen and was up 3.5% YoY in November.
And here is a graph of the year-over-year change in shelter from the CPI report (through November) and housing from the PCE report (through October 2023).
Shelter was up 6.5% year-over-year in November, down from 6.7% in October. Housing (PCE) was up 6.9% YoY in October, down from 7.2% in September. Shelter is still up sharply YoY due to increases in renewals, but with soft asking rents, we know the shelter index will continue to decline.
Low Levels of Delinquencies, Foreclosures and Real Estate Owned
Last week, I wrote Q3 Update: Delinquencies, Foreclosures and REO. In that article I noted that with substantial equity, and low mortgage rates (mostly at a fixed rates), few homeowners will have financial difficulties during this cycle.
Here is some new data from the Mortgage Bankers Association’s (MBA) National Delinquency Survey.
The mortgage delinquency rate increase in Q3 to a seasonally adjusted rate of 3.62 percent of all loans outstanding, up from the record low in Q2. This is historically very low.
Conclusions
We had seen significant year-over-year declines in both new and existing home sales; however, the new and existing home markets have diverged with new home sales still up from the 2022 bottom and existing home sales declining to new cycle lows in October.
House prices are under pressure due to higher mortgage rates, but prices are being supported by low levels of inventory.
Multi-family housing starts declined 30.0% YoY in October, and will remain under pressure, since household formation has slowed, lending has tightened, and the Architectural Billings Index has shown a decline in multi-family billing for fifteen consecutive months!