Home Prices Leap 6.4% YoY, Fastest Since Nov '22 Amid Tight Supply

Key Takeaway

• Home prices surged 6.4% year-over-year in February, marking the fastest pace since Nov. 2022, with a notable monthly increase of 0.6%.
• The S&P CoreLogic Case-Shiller Home Price Index indicates both the 10-and 20-City Composite indices are at all-time highs.
• Despite high mortgage rates above 7%, tight supply and rising demand are expected to sustain solid house price growth into 2024.

Home Prices Surge Amid Economic Uncertainty

In a surprising twist to the ongoing narrative of economic uncertainty, February saw U.S. home prices rise at the fastest rate since November 2022. According to the latest S&P CoreLogic Case-Shiller Home Price Index, prices nationwide increased by 6.4% compared to the same month last year, with a notable 7.3% increase in 20 of the nation's largest cities. This resurgence in home prices, as highlighted by Brian Luke of S&P Dow Jones Indices, brings the market to or near all-time highs, challenging the previous downturns experienced in the wake of the Federal Reserve's rate hikes and the peak in average mortgage rates last October.

Tight Supply Fuels Price Increases

The underlying driver of this unexpected price growth is a significant shortage of existing homes for sale, a situation exacerbated by homeowners reluctant to give up low-rate mortgages secured before the Fed's rate-hike cycle. This reluctance, coupled with a slow pace in home building, has kept the supply of homes well below historic norms, fueling price increases despite high mortgage rates. The Federal Housing Finance Agency (FHFA) reported a 1.2% month-to-month increase in February, the largest since April 2022, with a year-over-year increase of 7%, underscoring the impact of tight supply on the housing market.

Regional Trends Reflect National Dynamics

The national trend of rising home prices is mirrored in regional markets, with cities like San Diego, Detroit, and Chicago experiencing the most significant year-over-year price increases. This regional reflection of the national housing market's dynamics offers insight into the broader economic factors at play. For instance, the Midwest, with areas like Rockford, Illinois, and Milwaukee, is leading the recovery, showcasing the diverse economic and housing market conditions across the United States.

Federal Reserve's Inflation Challenge

The surge in home prices, while a positive indicator for the housing market, presents a complex challenge for the Federal Reserve. As the Fed continues its efforts to tame inflation, the indirect impact of rising home prices on inflation measures, particularly imputed rents, remains a concern. This situation highlights the intricate balance the Fed must maintain between controlling inflation and supporting economic growth, especially in a market as critical as housing.

Street Views

• Brian Luke, S&P Dow Jones Indices (Neutral on U.S. home prices):

  "Following last year's decline, U.S. home prices are at or near all-time highs... Our 10- and 20-City Composite indices are currently at all-time highs."

• Thomas Ryan, Capital Economics (Bullish on U.S. housing market):

  "The substantial shortage of existing homes for sale fueled a robust 0.4% [month-over-month] rise in house prices in February, consistent with our above-consensus call that house price growth will end 2024 at 5% [year-over-year]... Looking ahead, while still high mortgage rates will prevent a house price boom, we think the combination of tight supply and rising buyer demand will deliver a few more years of solid house price growth."