CALCULATED RISK

By Bill McBride

Yesterday, in Part 1: Current State of the Housing Market; Overview for mid-June I reviewed home inventory and sales.

House Prices

Reported YoY house price growth is still positive, but the Case-Shiller National Index slowed to 0.7% YoY in March.

The MoM increase in the seasonally adjusted Case-Shiller National Index was at 0.42%. This was the second MoM increase following seven consecutive MoM decreases.

Most measures of house prices have shown an increase in prices over the last few months, and a key question is off prices will soften again later this year.

Other measures of house prices indicated year-over-year slowing or further declines in April. The NAR reported median prices were down 1.7% YoY in April. Black Knight reported prices were up 1.0% YoY in April, and Freddie Mac reported house prices were up 0.3% YoY in April. 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. The median price was down YoY in April, and based on the recent trend, the FMHPI will be negative year-over-year in May – and Case-Shiller will follow within a few months.

In real terms, the Case-Shiller National index is down 4.2% from the peak, seasonally adjusted. Historically it takes a number of years for real prices to return to the previous peak, see House Prices: 7 Years in Purgatory.

30-Year Mortgage Rates Have Bounced between 6% and 7%

The following graph from MortgageNewsDaily.com shows mortgage rates since January 1, 2020. 30-year mortgage rates were at 6.98% on June 13th, near the recent highs, and still up year-over-year. Almost a year ago, mortgage rates moved about 6% for the first time since 2008.

A year ago, the payment on a $500,000 house, with a 20% down payment and 5.52% 30-year mortgage rates, would be around $2,276 for principal and interest. The monthly payment for the same house, with house prices up 0.7% YoY and mortgage rates at 6.98%, would be $2,709 – an increase of 19%.

But if we compare to two years ago, there is huge difference in monthly payments. In June 2021, the payment on a $500,000 house, with a 20% down payment and 2.98% 30-year mortgage rates, would be around $1,682 for principal and interest. The monthly payment for the same house, with house prices up 21.5% over two years and mortgage rates at 6.98%, would be $3,257 – an increase of 94%.

This increase in mortgage rates is probably the key reason new listings have declined sharply year-over-year – especially since a large number of homeowners refinanced at lower rates in 2020, 2021 and early 2022.

See: Could 6% to 7% 30-Year Mortgage Rates be the “New Normal”?

Here is some data from the FHFA’s National Mortgage Database showing the distribution of interest rates on closed-end, fixed-rate 1-4 family mortgages outstanding at the end of each quarter since Q1 2013 through Q4 2022.

This shows the recent surge in the percent of loans under 3%, and also under 4%, starting in early 2020 as mortgage rates declined sharply during the pandemic. The percent of outstanding loans under 4% peaked in Q1 2022 at 65.4%, and the percent under 5% peaked at 85.8%.

This is very different from the housing bust, when many homeowners were forced to sell as their teaser rates expired and they could not afford the fully amortized mortgage payment. The current situation is similar to the 1980 period, when rates also increased quickly.

Year-over-year Rent Growth Continues to Decelerate

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 April 2023, except CoreLogic is through March and Apartment List is through May 2023.

Asking rents are slowing down, and new supply is coming in on the market, and this suggests we might see asking rents down year-over-year soon.

However, yesterday, John Burns of noted (see tweet for graphic)

All 3 publicly-traded SF REITs just reported 7%+ rent increases for all to see.

This is important for housing and also for monetary policy.

Conclusions

We have seen a significant year-over-year decline in new and existing home sales, although it is likely that activity has bottomed (but not prices).

House prices are under pressure due to higher mortgage rates, but prices are being supported by low levels of inventory. See: House Price Battle Royale: Low Inventory vs Affordability.

Existing home sales will likely be down less year-over-year NSA in May compared to April. Multi-family housing starts will probably show further declines.