CALCULATEDRISK
By Bill McBride
Last week, in Part 1: Current State of the Housing Market; Overview for mid-November I reviewed home inventory and sales.
House Prices
The Case-Shiller National Index was increased 1.0% year-over-year in August and will turn more positive YoY in September (based on other data).
The MoM increase in the seasonally adjusted Case-Shiller National Index was at 0.9%. This was the seventh consecutive MoM increase following seven straight MoM decreases.
Most measures of house prices have shown an increase in prices over the last several months, and 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 September Case-Shiller index. The NAR reported median prices were up 2.8% YoY in September, down from 3.9% YoY in August. ICE / Black Knight reported prices were up 4.3% YoY in September, up from 3.7% YoY in August to new all-time highs, and Freddie Mac reported house prices were up 5.2% YoY in September, up from 4.3% YoY in August – 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 September.
In real terms, the Case-Shiller National index is down 3.1% 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 are Solidly Above 7%
The following graph from MortgageNewsDaily.com shows mortgage rates since January 1, 2010. 30-year mortgage rates were at 7.56% on November 10th, 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 7.14%, and two years ago rates were at 3.20%.
A year ago, the payment on a $500,000 house, with a 20% down payment and 7.14% 30-year mortgage rates, would be around $2,699 for principal and interest. The monthly payment for the same house, with house prices up slightly YoY and mortgage rates at 7.56%, would be $2,886 – an increase of 7%.
However, if we compare to two years ago, there is huge difference in monthly payments. In September 2021, the payment on a $500,000 house, with a 20% down payment and 3.20% 30-year mortgage rates, would be around $1,730 for principal and interest. The monthly payment for the same house, with house prices up 15.9% over two years and mortgage rates at 7.56%, would be $3,261 – an increase of 89%! Almost double!!!
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. Many potential move-up or move-down buyers have “golden handcuffs” and are unwilling to sell and give up their low mortgage payment.
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. 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 September 2023, except CoreLogic is through August and Apartment List is through October 2023.
Asking rents are down YoY, and with new supply coming on the market, we will likely see further declines in asking rents.
Last month, the BLS noted in the CPI report: “The index for shelter was the largest contributor to the monthly all items increase, accounting for over half of the increase.” We will likely see a similar comment regarding shelter when October CPI is released this Tuesday.
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 sharply and was up 2.8% YoY in September.
And here is a graph of the year-over-year change in shelter from the CPI report (through September) and housing from the PCE report (through September 2023).
Shelter was up 7.1% year-over-year in September, down from 7.2% in August. Housing (PCE) was up 7.2% YoY in September, down from 7.4% in August. 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
In September, I wrote Q2 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 September.
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 31.4% YoY in September, 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 fourteen consecutive months!