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

Key Takeaway

• Home prices surged 6.4% year-over-year in February, marking the fastest pace since November 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 hit all-time highs amid economic uncertainties.
• Despite high mortgage rates above 7%, tight supply and rising demand are expected to sustain solid house price growth into the future.

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 pace since November 2022. According to the latest S&P CoreLogic Case-Shiller Home Price Index, national home prices 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 rise in home prices is a significant shortage of existing homes for sale. This scarcity has fueled a robust 0.4% month-over-month increase in house prices in February, aligning with predictions that house price growth could end 2024 at a 5% year-over-year increase. Despite high mortgage rates, which Freddie Mac reports remain above 7%, the combination of tight supply and rising buyer demand is expected to sustain solid house price growth in the coming years. This scenario is further corroborated by the Federal Housing Finance Agency, which reported a 1.2% month-to-month increase in February, the largest since April 2022, and a year-over-year increase of 7%.

Regional Trends and Federal Reserve Concerns

The surge in home prices is not uniform across the country but is particularly pronounced in cities like San Diego, Detroit, and Chicago, which saw the biggest price increases over the past year. This regional variation reflects the broader national trend of escalating real estate values amidst a constrained inventory landscape. However, this price surge poses a challenge for the Federal Reserve, as it indirectly influences inflation measures through imputed rents, complicating the central bank's efforts to tame inflation.

A Complex Market Outlook

The current state of the U.S. housing market presents a complex picture. On one hand, the tight supply of homes, exacerbated by homeowners holding onto low-rate mortgages and a slow pace of home building, is driving up prices. On the other hand, high mortgage rates are expected to temper a housing price boom, despite the rising demand. This dynamic suggests a period of sustained, albeit moderated, growth in house prices, reflecting the intricate balance between supply constraints and economic policy impacts.

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. home prices):

  "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."