Case-Shiller: Home Prices Decelerate Like 'Never Before'

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index issued Oct. 25 showed a -2.6% difference between its July and August figures, the largest month-over-month deceleration in the history of the index.

The Case-Shiller Home Price Indices for August is a three-month average of June, July and August closing prices. June closing prices include some contracts signed in April, so there is a significant lag to this data, reported Bill McBride of the Calculated Risk blog.

The MoM decrease in Case-Shiller was at -0.86% seasonally adjusted. This was the second consecutive MoM decrease, and the largest MoM since February 2010.

Because this includes closings in June and July, this suggests prices fell sharply for August closings, according to McBride.

July’s deceleration now ranking as the second largest.

On a seasonally adjusted basis, prices declined in all Case-Shiller cities on a month-to-month basis. The largest monthly declines seasonally adjusted were in San Francisco (-3.7%), Seattle (-2.9%), and San Diego (-2.5%). San Francisco has fallen 8.2% from the May 2022 peak.

Homebuyers Facing a Harsh New Reality

John Pawlowski, head of Green Street’s Residential Sector, tells GlobeSt.com that a rapid increase in the price of new loans is impacting institutional investors and prospective homebuyers, alike.

“Mortgage rates heading from 5% in April to approximately 7% today, should send ripple effects across the housing market and benefit rental fundamentals in the near-term,” Pawlowski said.

The 30-year fixed mortgage rates have surged nearly 400 bps in ’22.

“Home prices continued to rise earlier in the year, and at first glimpse seemed to defy the mortgage market headwinds; however, with rates now hovering around 7%, home buyers are facing a harsh new reality, which will change the tide in the for-sale market and carry ripple effects on the rental market,” Pawlowski said.

“Elevated borrowing costs continue to eat away at a household budget as individuals increasingly spend more of their incomes on shelter.

“A prospective buyer’s monthly payment on a home is up by ~60% since the beginning of ’22 when mortgage rates were low-3%.

“At current rates, households earning the median income looking to buy a median home in the country are facing spending up to 50% of their annual income on homeowner costs alone.

“Higher monthly interest payments, combined with larger down payment savings required and higher property tax payments following three years of significant cumulative price appreciation, may have a greater impact on higher-end homes.

“Making matters worse for homebuyers, the dearth of supply at the starter home price point (<$500K) should keep a relative floor on prices of homes that a first-time homebuyer could acquire, particularly as buyers trade down into lower priced homes.”

Individuals are Being Pushed Out of Owning

The National Association of Realtors’ index of home affordability for first-time home buyers recently plummeted to levels not seen since 2006.

“Values of these homes should be more resilient versus the high-end or luxury market where rates will have outsized impacts on financing costs,” Pawlowski said.

“The current cost of ownership will result in many renting longer. Expectations of lower structural turnover over the next 12 to 18 months across rental portfolios seems reasonable as individuals are being priced out of ownership.”

He said that regionally, higher mortgage rates will be most felt in higher-cost coastal MSAs versus those of the Sun Belt, as home prices as a multiple of household incomes in coastal markets stands at 7.1x versus the Sun Belt at 5.8x.”

“On average across the Top 50 MSAs, homeownership is approximately 40% more expensive than renting.”

Cost of Housing Pushing More to Renting

Clarion Partners Chief Investment Officer Jeb Belford tells GlobeSt.com, “Whether needing to either rent or own, housing is a necessity.

“And the recent run-up in for-sale housing prices and sharply higher debt costs make home ownership even more challenging.

“This will very likely push more people into the renter pool, or keep them there longer, bolstering fundamentals and rent growth for apartments and rental housing in general.

“That said, there is a risk that counterbalancing forces, such as recession-led consumption declines and job losses, may temper demand and the willingness/ability to pay higher rents, and keep more people at home with family or doubled up to save money.”