Contradiction: Home Prices Encounter Both Challenges and Escalating Demand

Despite the trajectory of increasing interest rates, recent data from both the CoreLogic Case-Shiller indices and the Housing Price Index (HPI) released by the Federal Housing Finance Agency (FHFA) have shown continued appreciation in home prices throughout the past year.

However, this appreciation hasn’t matched the double-digit growth experienced during the peak of the pandemic and its immediate aftermath. While all indices have recorded annual gains, there has been a noticeable softening of the market in recent months.

The Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, revealed a 5.5 percent annual increase in home prices for December.

This represented a half-point rise from the annual gain observed in November. Similarly, the 10-City Composite saw a 7.0 percent year-over-year increase, up from 6.3 percent in the previous month, while the 20-City Composite recorded a 6.1 percent rise compared to 5.4 percent in November.

San Diego led the pack with the highest year-over-year gain among the 20 cities, boasting an increase of 8.8 percent. Following closely behind were Los Angeles and Detroit, both recording gains of 8.3 percent. Meanwhile, Portland showed a modest 0.3 percent increase for the month, marking the lowest rank among the cities.

Despite this, Portland reported the smallest year-over-year growth, although it’s worth noting that this marks a reversal from 11 consecutive months of losses.

When considering non-seasonally adjusted month-over-month changes, all cities experienced declines. The U.S. National Index saw a 0.4 percent decrease, while both the 20-City and 10-City Composites dipped by 0.3 percent and 0.2 percent, respectively. However, after seasonal adjustment, all three indices managed to eke out gains of 0.2 percent.

“Reflecting on the year, 2023 has proven to surpass average annual home price gains observed over the past 35 years. With national trend growth typically hovering around 4.7 percent, the recorded 5.5 percent return indicates a robust and stable trajectory.

Although the double-digit surges witnessed in the preceding years have tapered off, the sustained growth above trend is commendable, especially considering the escalating costs associated with financing home mortgages.

Previously, there were speculations that the surge in home prices during the COVID-19 pandemic might have induced a temporary acceleration in home ownership.

However, the past two years have shown consistent growth slightly above the trend, indicating a potential more enduring shift in home ownership dynamics post-pandemic.

In the immediate future, we anticipate being able to gauge the impact of higher mortgage rates on home prices. The uptick in financing costs appears to have influenced home price dynamics, with 15 markets experiencing lower values compared to September, particularly evident in the fourth quarter.”

Dr. Selma Hepp, the chief economist at CoreLogic, underscored the remarkable resilience displayed by home prices despite facing headwinds such as high borrowing costs and a limited housing inventory. She noted, “As mortgage rates persistently hover around the 7 percent range, convincing existing homeowners to relocate remains challenging.

However, she highlighted the recent surge in mortgage application data following a decline in rates, indicating that prospective buyers are eagerly awaiting an opportunity to enter the market once mortgage rates decrease. Hepp anticipates that 2024 will witness yet another year of record-high home prices as a result.

The Federal Housing Finance Agency’s (FHFA) fourth-quarter 2023 Housing Price Index (HPI) revealed a 6.5 percent increase in U.S. house prices compared to the fourth quarter of 2022, marking a 1.5 percent rise from the end of the third quarter of the same year. This perpetuates a trend of consistent annual appreciation observed in every quarter since the onset of 2012. Additionally, the data indicated a minimal 0.1 percent change in house prices from November to December.

Dr. Anju Vajja, Acting Deputy Director for FHFA’s Division of Research and Statistics, remarked on the modest increase in U.S. house prices throughout 2023. She noted, “While house prices experienced a steady uptick, the market exhibited signs of softening, particularly evident in the lower house price appreciation observed in the fourth quarter compared to the preceding quarter.”

Between the fourth quarter of 2022 and the same period in 2023, house prices surged in 49 states, demonstrating robust growth across the nation. The most substantial increases, all registering in double digits, were witnessed in Rhode Island, Vermont, West Virginia, Connecticut, and New Jersey. However, two regions experienced annual price depreciation, notably Hawaii with a decline of 3.4 percent and the District of Columbia with a decrease of 1.2 percent.

Across all nine census divisions, positive annual price changes were recorded. New England exhibited the most significant growth, boasting a remarkable 10.3 percent increase, while the West South Central division reported the smallest uptick at 3.2 percent.

The Case-Shiller Indices meticulously monitor matched price pairs for thousands of individual houses, with each index standardized to 100 in January 2000. Presently, the National Index stands at 310.67, reflecting significant appreciation since its inception.

Similarly, the 10-City Composite sits at 332.85, and the 20-City Composite at 317.39, indicating substantial growth in home prices over the past two decades.

On the other hand, FHFA’s House Price Index (HPI) tracks home sales financed by either Fannie Mae or Freddie Mac and was established with a baseline of 100 in January 1991. As of the latest data, the HPI has surged to 417.8, underscoring the remarkable escalation in housing values over the years.

Matthew Graham
Matthew Graham
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