The latest release of the Case-Shiller home-price index confirmed what other recent data and anecdotes have suggested: Home prices, undeterred by the pandemic and recession, have risen to new highs remarkably quickly.
The latest release of the Case-Shiller home-price index confirmed what other recent data and anecdotes have suggested: Home prices, undeterred by the pandemic and recession, have risen to new highs remarkably quickly.
Home prices rose 8.4% year over year in October, according to the S&P CoreLogic Case-Shiller Home Price Index, notching the fastest annual growth since the housing market began to recover in 2014 from the crash that sparked the financial crisis. The home-price index is now nearly 25% higher than its previous peak in 2006.
Home-price appreciation is ordinarily considered a positive, boosting household wealth and contributing to the greater economy, but today it comes as the Covid-19 pandemic has put millions out of work. While home sales in recent months have soared above last year’s levels, housing market economists have been sounding the alarm about the potential impact of rising prices and a historically tight inventory of homes for sale. “Housing affordability, which had greatly benefited from falling mortgage rates, is now being challenged due to record-high home prices,” wrote Lawrence Yun, chief economist of the National Association of Realtors, or NAR, in the organization’s latest report on existing-home sales. “That could place strain on some potential consumers, particularly first-time buyers.” It might seem counterintuitive for prices to rise so quickly, as millions are receiving jobless benefits, but the groundwork for price appreciation was laid long before Covid-19. For the past several years, a low supply of entry-level homes combined with relatively low mortgage rates helped drive prices higher, threatening affordability for prospective first-time buyers.
Moving on Up
Home prices have been on the rise through 2020, with the median monthly cost ofowning a home near multiyear highs despite the pandemic-driven recession andelevated unemployment.
Covid-19 added fuel to the fire. As initial restrictions meant to slow the spread of the virus loosened and monetary policy helped drive already-low rates lower, buyers re-entered the market in greater force than the year prior, some probably prompted by the increased flexibility of remote work or plans to move accelerated by the virus. Meanwhile, the inventory of homes for sale shrank, reaching a record low by the end of November, according to NAR.
As prices have risen, buying a home has become less affordable. In the current quarter, 55% of housing markets examined by property data company Attom Data Solutions were less affordable than their historical averages, up from 43% a year ago, while home prices appreciated faster than wages in 90% of the markets analyzed.
While current homeowners may benefit from rising home values, “home seekers are having a harder time affording the typical home, which puts a cloud over the future of the housing market,” wrote Todd Teta, Attom’s chief product officer. “If affordability worsens much more, it could lead to significantly fewer home seekers qualifying for loans.”
Economists have warned in recent months about a growing number of hurdles to homeownership that could contribute to a less equal pandemic recovery. Rising home prices could threaten potential buyers’ ability to save for a down payment, NAR’s Yun said in November. That’s a particular concern for first-time buyers, “who don’t have the luxury of using housing equity from a sale,” he noted.
A dearth of entry-level homes on the market is another barrier for first-time buyers. While inventory of existing homes fell across most price points in November, supply fell most sharply among the lowest-priced homes, with the supply of those priced below $100,000 falling 38.5% compared with the same month in 2019, according to NAR. The supply of those priced from $100,000 to $250,000 fell 27.5% annually, while those priced between $250,000 and $500,000 fell 16.3%.
The benefit of ultralow interest rates has also slimmed in recent months amid swiftly rising home prices, economists have said. When the average 30-year fixed mortgage rate fell to 2.71% in early December, Freddie Mac chief economist Sam Khater said the benefit of the then-historically low rate was overshadowed by price appreciation. “Unfortunately, the record low supply combined with strong demand means home prices are rapidly escalating and eroding the benefits of the low mortgage rate environment,” he wrote in a Dec. 3 release.
As prices continue to climb, sticker shock could become a bigger concern for potential home buyers, Ivy Zelman, CEO of housing research firm Zelman & Associates, previously told Barron’s. “If we continue to see that upward pressure [on home prices] because inventories are so tight, you’ll start to see pushback by consumers,” she said.
So far, rising home prices appear to have had minimal impact on home sales and contract signings, which, despite recent month-over-month declines, remain higher than the same time last year. And experts say rising prices are unlikely to lead to a sudden letup in buyer demand. “It’s not a market that’s [so] stratospheric it’s going to come crashing back down to earth,” Mark Zandi, chief economist at Moody’s Analytics, told Barron’s recently. “For that to happen, the economy would have to crater, or interest rates would have to spike.”
But affordability could become a bigger problem for first-time buyers or those hit by the pandemic in 2021 if supply remains tight and broader economic questions surrounding the recovery fail to be resolved in home buyers’ favor.
And if home affordability continues to worsen, “buyers will be priced out of the market, which could drop demand and halt the price rise,” says Attom’s Teta. That, in turn, “could pull a major piece out from the foundation of the housing market during very uncertain times.”