Introduction to the Housing Market
The Case-Shiller Home Price Index has seen a decline of 0.3 percent in May, marking the third consecutive month of decline. This index is a crucial measure of the housing market, tracking the sales prices of the same homes over time and factoring out major improvements. It provides a more accurate picture of the market than median or average prices, which do not account for variables like square footage, location, lot size, or amenities.
Understanding the Case-Shiller Index
It’s essential to note that the Case-Shiller Index is a lagging indicator, meaning its reports reflect sales that occurred a few months prior. The May report includes sales from March, April, and May, but these sales could be based on contracts signed as far back as January. This lag is significant because it means the current market conditions may not be fully reflected in the latest reports.
Recent Trends in Home Prices
Looking at the percent change since January 2020, the Case-Shiller National Index has seen a 52.1% increase, while the Case-Shiller 10-City Index has risen by 52.4%. In contrast, the Owners’ Equivalent Rent (OER), which measures the price homeowners would pay to rent their own home unfurnished and without utilities, has increased by 44.9%. The Consumer Price Index (CPI) for rent has risen by 28.0%, and the overall CPI has increased by 24.3%.
Monthly and Yearly Changes
On a month-to-month basis, prices are down for the third consecutive month. However, the decline is minimal, with the National Index down 0.9% from its peak and the 10-City Index down 0.6%. Year-over-year, prices are still up, indicating that despite the recent declines, home prices remain higher than they were last year.
The Impact of Fed Policies
The current state of the housing market is largely a result of the Federal Reserve’s policies. By not considering home prices as part of inflation, the Fed has contributed to the affordability crisis. Home prices are not directly included in the CPI or the Personal Consumption Expenditures (PCE) index, which the Fed uses as its preferred measure of inflation. Economists view home prices as a capital expense rather than a consumer expense, but this perspective overlooks the significant impact of housing costs on individuals and the broader economy.
Existing Home Sales and Inventory
Existing-home sales have declined by 2.7%, and while the median price was initially reported to have reached a new record high, this claim is questionable due to poor seasonal adjustments by the National Association of Realtors (NAR). Moreover, home builders have the most completed homes for sale since the Great Recession, a sign of a market that is cooling down. Rising inventories, combined with the lag in market reflections and a slowing economy, point to negative home price pressures.
Conclusion
The housing market is facing significant challenges, including declining sales, rising inventories, and affordability issues exacerbated by the Fed’s policies. For homes to become more affordable, mortgage rates need to decrease, and home prices need to fall substantially. The current situation is a complex mess, and there are no easy solutions. As the market continues to evolve, it’s crucial to monitor these trends and understand the underlying factors driving change in the housing market.
