Home Prices ‘Resilient’ Amid Still-Tight Inventories

Two reports show home prices continuing to surge as tight inventories and low vacancy rates push competition among home buyers.

S&P Down Jones Indices, New York, released its S&P Corelogic Case-Shiller Home Price Indices, showing home prices jumped by 6.2 percent annually in January, down slightly from 6.3 percent in December. Month over month, the Indices reported an 0.5 percent gain.

In a separate report, First American Financial Corp., Santa Ana, Calif., said its Real Home Price Index showed house prices increased 2.3 percent between December and January and by 2.3 percent year over year. The report said consumer house-buying power–how much one can buy based on changes in income and interest rates–declined by 1.5 percent between December and January, but increased by 3.7 percent year over year.

S&P said its 10-City Composite annual increase rose by 6.0 percent, no change from the previous month. The 20-City Composite posted a 6.4 percent year-over-year gain, up from 6.3% in the previous month.

Seattle, Las Vegas, and San Francisco reported the highest year-over-year gains among the 20 cities. In January, Seattle led the way with a 12.9 percent year-over-year price increase, followed by Las Vegas with an 11.1 percent increase and San Francisco with a 10.2 percent increase. Twelve of the 20 cities reported greater price increases in the year ending January 2018 from a month ago.

Before seasonal adjustment, S&P said the National Index posted a month-over-month gain of 0.05 percent in January. The 10-City and 20-City Composites both reported increases of 0.3 percent. After seasonal adjustment, the National Index recorded a 0.5 percent month-over-month increase in January. The 10-City and 20-City Composites posted 0.7% and 0.8 percent month-over-month increases, respectively. Sixteen of the 20 cities reported increases in January before seasonal adjustment, while all 20 cities reported increases after seasonal adjustment.

“The home price surge continues,” said David Blitzer, Managing Director and Chairman of the Index Committee with S&P Dow Jones Indices. “Since the market bottom in December 2012, the S&P Corelogic Case-Shiller National Home Price index has climbed at a 4.7 percent real–inflation adjusted–annual rate. That is twice the rate of economic growth as measured by the GDP.”

Blitzer said two factors supporting price increases are low inventory of homes for sale and low vacancy rate among owner-occupied housing. “Despite limited supplies, rising prices, and higher mortgage rates, affordability is not a concern,” he said.

Cheryl Young, senior economist with Trulia, San Francisco, said the 6.2 percent year-over-year growth defied fleeting concerns that rising mortgages and tax reform would dampen demand and soften price growth. “Despite these threats to dampen demand, low inventory and a strong economic conditions bolstered price growth to start 2018,” she said. “First-time home buyers, however, will continue to struggle to find homes within their price range as prices climb higher amid low inventory.”

Mark Vitner, senior economist with Wells Fargo Securities, Charlotte, N.C., suggested although home price appreciation continues at a breakneck pace, “affordability concerns may be easing. The gap between the HPI and wages has narrowed from 3.3 percent in February 2017 to just 1.3 percent today,” he said.

S&P reported as of January, average home prices for the MSAs within the 10-City and 20-City Composites are back to their winter 2007 levels.

First American Chief Economist Mark Fleming dismissed affordability concerns, saying consumer house-buying power more than offsets rising interest rates. “Household income growth has been strong enough to offset higher mortgage rates. As a result of stronger consumer house-buying power, real house prices only increased by 2.3 percent in January compared with a year ago.”

Fleming said even under a hypothetical scenario where mortgage rates double over the next year, First American’s analysis indicates that nominal house price growth would increase above 7 percent as the spring home-buying market heats up, and slow down to 5.8 percent by the beginning of 2019,” he said. “So, even in the highly unlikely scenario where mortgage rates double over the next year, house price appreciation will not be considerably impacted.”

First American said real house prices are 35.8 percent below their housing boom peak in July 2006 and 13.8 percent below the level of prices in January 2000.

“As we look ahead, it’s reasonable to expect borrowing costs to increase as mortgage rates rise, in turn reducing consumer house-buying power, which reduces affordability,” Fleming said. “The good news is that, even in the unlikely case that mortgage rates rise faster than expected, our housing market is well positioned to adapt.”

The report said states with the greatest year-over-year increase in real prices are New York (+8.7 percent), Nevada (+7.5 percent), Delaware (+6.6 percent), New Hampshire (+6.1 percent) and Kentucky (+5.5 percent). States with the greatest year-over-year decrease are Washington, D.C. (-5.5 percent), Arkansas (-4.6 percent), Maryland (-4.3 percent), New Jersey (-3.5 percent) and Wyoming (-2.5 percent).

Local markets with the greatest year-over-year increase in real prices are San Jose, Calif. (+12.0 percent), Las Vegas (+8.8 percent), Seattle (+6.6 percent), Jacksonville, Fla. (+6.2 percent) and Nashville, Tenn. (+6.0 percent). Markets with the greatest year-over-year decrease in are Pittsburgh (-7.8 percent), Riverside, Calif. (-3.3 percent), Memphis, Tenn. (-2.4 percent), Baltimore (-2.0 percent) and Virginia Beach, Va. (-1.8 percent).