CALCULATEDRISK
By Bill McBride
Yesterday, in Part 1: Current State of the Housing Market; Overview for mid-October I reviewed home inventory and sales.
House Prices
The Case-Shiller National Index was increased 1.0% year-over-year in July and will turn more positive YoY in August (based on other data).
The MoM increase in the seasonally adjusted Case-Shiller National Index was at 0.65%. This was the sixth 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 over the next few months in the Case-Shiller index. The NAR reported median prices were up 3.9% YoY in August, up from 1.7% YoY in July. ICE / Black Knight reported prices were up 3.8% YoY in August, up from 2.4% YoY in July to new all-time highs, and Freddie Mac reported house prices were up 4.0% YoY in August, up from 2.9% YoY in July – 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 August.
In real terms, the Case-Shiller National index is down 3.4% 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 are Solidly Above 7%
The following graph from MortgageNewsDaily.com shows mortgage rates since January 1, 2010. 30-year mortgage rates were at 7.81% on October 6th, the highest in 23 years. A year ago, 30-year mortgage rates were at 7.04%, and two years ago rates were at 3.13%.
A year ago, the payment on a $500,000 house, with a 20% down payment and 7.04% 30-year mortgage rates, would be around $2,672 for principal and interest. The monthly payment for the same house, with house prices up slightly YoY and mortgage rates at 7.81%, would be $2,910 – an increase of 9%.
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 3.13% 30-year mortgage rates, would be around $1,715 for principal and interest. The monthly payment for the same house, with house prices up 16.7% over two years and mortgage rates at 7.81%, would be $3,364 – an increase of 96%! 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.
See: The “New Normal” Mortgage Rate Range
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 August 2023, except CoreLogic is through July and Apartment List is through September 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 gasoline was the largest contributor to the monthly all items increase, accounting for over half of the increase. Also contributing to the August monthly increase was continued advancement in the shelter index, which rose for the 40th consecutive month.” We will likely see a similar comment regarding shelter when September CPI is released this Thursday.
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 3.1% YoY in August.
And here is a graph of the year-over-year change in shelter from the CPI report (through August) and housing from the PCE report (through August 2023).
Shelter was up 7.2% year-over-year in August, down from 7.7% in July. Housing (PCE) was up 7.4% YoY in August, down from 7.7% in July. 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 month, 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.
Last week I posted outstanding mortgages by interest rate, the average mortgage interest rate, borrowers’ credit scores and current loan-to-value (LTV) from the FHFA’s National Mortgage Database through Q2 2023 and concluded:
Since lending standards have been solid and most homeowners have substantial equity, there will not be a huge wave of single-family foreclosures this cycle. And that means we will not see cascading price declines like following the housing bubble.
Here is some data 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 Q2 2023.
And here is a graph of the current loan-to-value (LTV) of all outstanding mortgage loans.
Over 69% of borrowers have current LTVs under 60% (and this doesn’t include all the homes without a mortgage). And 91.9% of borrowers have LTVs under 80%. This is very different than during the housing bubble and bust, when a large percentage of borrowers had little or no equity.
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 likely declining to new cycle lows.
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 sharply in August, 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 thirteen consecutive months!