House Prices Rose More Than Expected In July And August,
Likely Tipping The Balance For The Fed To Hike Again By Year-End
• House price indexes rose more than expected in July.
• New home sales fell in August although sales in July were revised higher.
• Prices of newly-built houses in August registered their smallest year-ago decline since March, while prices of existing homes rose for a second consecutive month in the same terms.
• The Fed will see the reacceleration of house prices as a reason to keep interest rates higher for longer.
• It’s a close call, but inflation pressures from housing will likely tip the balance for the Fed to raise rates another quarter percent by year-end.
The FHFA Purchase-Only House Price Index rose 0.8% in July after a 0.4% increase in June, revised up from 0.3% in the prior release. This was above the 0.4% consensus forecast. The S&P CoreLogic Case-Shiller 20-City House Price Index (“Case-Shiller HPI”) rose 0.9% in July, also above the consensus forecast of 0.7%. From a year earlier, the FHFA HPI rose 4.6%, up from 3.2% in June. The Case-Shiller HPI edged up 0.1% from a year earlier in July after falling 1.2% in those terms in June, registering its first year-over-year increase since February.
In the FHFA’s dataset, prices rose fastest in year-over-year terms in New England, up 8.1%; the Middle Atlantic, up 7.1%; and the East North Central Census Division (Great Lakes States), up 7.0%. Prices rose slowest in the Mountain States, up 0.3%; the Pacific, up 0.5%; and the West South Central Census Division (Texas and its neighbors, up 2.6%).
In the Case-Shiller’s metro-level data, the fastest year-over-year increases were in Chicago, up 4.4%; Cleveland, up 4.0%; New York, up 3.8%; and Detroit, up 3.2%. The largest year-over-year declines were Las Vegas, down 7.2%; Phoenix, down 6.6%; San Francisco, down 6.2%; Seattle, down 5.5%; and Dallas, down 3.4%.
The S&P Index attempts to measure the price of the entire housing stock by imputing the prices of houses that do not sell in the month. The FHFA Purchase-Only Index measures prices directly from sales transactions, which likely skews the FHFA HPI up relative to the price of all housing, since more desirable units are more likely to command higher prices and sell.
In a separate data release from the Census Bureau, new home sales pulled back 8.7% to 675,000 seasonally-adjusted annualized units in August from 739,000 in July, which was revised up from 714,000 in the prior release. August undershot the 698,000 consensus forecast, but the upward revisions to July keep sales in the third quarter tracking with consensus expectations.
The median sale price of a newly-built single-family house fell 2.3% on the year in August after a fall of 8.7% in June. The year-over-year decline in the price of a newly-built home was the smallest since March, another sign that house prices are firming. Ongoing declines in sale prices for new construction reflect homebuilders reducing the average size of units sold over the last year to make homebuying less unaffordable.
Existing home sales data for August were released last week. They slipped to 4.04 million units at a seasonally-adjusted annual rate from 4.07 million in July and were the lowest since January. The median sale price of an existing home rose 1.7% from a year earlier in July, which picked up to a 3.9% increase in August. Existing home prices fell in these terms from March to June, but are firming like other measures of home prices.
The resilience of house prices in 2023 reflects how high mortgage rates are reducing both demand and supply. On the demand side, high mortgage rates and house prices mean the housing market is the least affordable relative to incomes since the 1980s. On the supply side, homeowners are reluctant to give up low mortgage rates locked in before the Fed began tightening policy in 2022, keeping listings sparse. This is keeping house prices high despite much lower sales volumes than in 2020 or 2021. In monthly terms, prices have risen rapidly in the last few months. Some U.S. metros continue to see lower prices than a year ago, but most measures of national average prices show the bottom is already in the rear view.
The Fed will see the reacceleration of house prices as a reason to keep interest rates higher for longer. Renting households are seeing some relief in new lease prices, but since two-thirds of Americans are homeowners, the Fed cannot afford to look past house prices’ influence on the cost of living. It’s a close call, but shelter cost inflation will likely tip the balance toward the Fed raising rates another quarter percentage point by year end to keep sand in the gears of the housing market and prevent further acceleration of house prices.
