CALCULATEDRISK
By Bill McBride
Almost every day a journalist or an analyst asks me what will happen with house prices.
Every cycle is different, and usually I focus on inventory, sales, and months-of-supply to answer this question.
However, there have been significant policy changes this year, especially with trade and immigration. This has led to a period of rising inflation, and a weakening employment situation (rising unemployment rate). A period of stagflation.
These are powerful forces for the economy and housing. Bond yields are falling with the weak economy, pushing 30-year mortgage rates below 6.5% for the first time since October 2024. And lower mortgage rates could boost sales.
But what is the impact of rising unemployment?
The following graph shows the year-over-year in the Case-Shiller National Index versus the Sahm rule (from economist Claudia Sahm). The Sahm rule is a measure of changes in the unemployment rate. It compares the three-month moving average of the unemployment rate (U3) to the minimum of the three-month averages from the previous 12 months.
In general, a rising unemployment rate corresponds to weaker house prices. Of course, correlation does not imply causation. And there are exceptions – like at the onset of the pandemic when the unemployment increased sharply, but house prices took off (mortgage rates fell sharply and most potential homebuyers stayed employed).
If the unemployment rate continues to rise, this will likely put downward pressure on house prices.
Most forecasts for 2025 were for U.S. house prices to increase modestly in the 3% to 4% range. My early view was “mostly flat prices nationally in 2025” with some areas seeing price declines. Nationally, I didn’t expect either a crash in prices or a surge in prices.
There are regional differences, for example Austin and parts of Florida have already seen double digit price declines.
The following table shows the YoY price slowdown nationally. Note that the median price is impacted by the mix of homes sold.
The seasonally adjusted Case-Shiller National Index is down slightly year-to-date (YTD). The index was at 327.90 in December 2024 and was at 326.36 in the June report.
And the Freddie Mac HPI SA is down slightly YTD. The index was at 299.66 in December, and is now at 296.56, a decline of 0.8%.
Based on the trend, the increase in inventory (and months-of-supply), it appears house prices will be down slightly in 2025. Falling mortgage rates and rising unemployment might impact prices in 2026.