Case-Shiller Home Prices Decline
The latest report from Case-Shiller indicates a 0.3 percent decline in home prices for April, following a 0.1 percent decline in March. This trend is significant, and to understand its implications, it’s essential to delve into the details of the Case-Shiller index and its relevance to the current housing market.
What Is Case-Shiller?
Case-Shiller measures the sales prices of the exact same homes over time, factoring out major improvements. This method provides a more accurate picture of the housing market than median or average prices, which do not account for variations in square footage, location, lot size, or amenities. However, it’s crucial to note that Case-Shiller is a lagging indicator, meaning the latest report reflects sales from previous months, with April’s report including sales from February, March, and April. Moreover, the sales data reflect the date when the sales closed, not when the contracts were signed, which can range from as far back as December for February closings.
Implications of the Lag
On average, the April report represents prices from January or February. In declining markets, this lag means prices are lower than the report indicates, and in rising markets, prices are higher than the report suggests. This lag is more pronounced in Case-Shiller than in other existing-home measures, such as those from the National Association of Realtors (NAR).
Price Changes Over Time
Looking at the percent change since January 2020:
- Case-Shiller National: 52.5%
- Case-Shiller 10-City: 52.6%
- Owners’ Equivalent Rent (OER): 41.2%
- CPI Rent: 27.8%
- CPI: 24.0%
OER refers to the price one would pay to rent their own house, unfurnished and without utilities, instead of owning it. While no one directly pays OER, many argue that the Consumer Price Index (CPI) is overstated because it includes OER. From the perspective of those looking to buy a home, however, the CPI significantly underestimates the true cost of housing. The significant increase in home prices, more than doubling the alleged CPI, is particularly challenging for Millennials and Zoomers who are priced out of the housing market.
Year-over-Year Changes
The change from the previous year also provides valuable insights into the current state of the housing market. The year-over-year percent change highlights the ongoing trends and whether the market is experiencing growth, stability, or decline.
A Mess of the Fed’s Making
The current state of the housing market, with its unaffordable prices and inflation concerns, is largely a result of the Federal Reserve’s policies. By not considering home prices as part of inflation in their calculations, such as in the CPI or the Personal Consumption Expenditures (PCE) index, the Fed overlooked significant inflation signals during the Great Recession and again during the Covid recession. Economists view home prices as a capital expense rather than a consumer expense, but this perspective overlooks the broader impact of housing costs on inflation and consumer spending.
The Fed now faces a dilemma with no straightforward solution. For housing to become affordable again, mortgage rates need to decrease, and home prices need to fall dramatically. However, such adjustments could have unintended consequences on the overall economy, making the Fed’s decision-making process even more challenging.
Conclusion
In conclusion, the decline in Case-Shiller home prices, although slight, signals a complex housing market influenced by the Federal Reserve’s monetary policies and the broader economic landscape. Understanding the nuances of the Case-Shiller index and its implications for housing affordability and inflation is crucial for both policymakers and individuals navigating the housing market. The path forward is fraught with challenges, and the Fed’s next moves will be closely watched as they attempt to balance the need for affordable housing with the risk of further inflation and economic instability.
