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The heat emanating from the U.S. housing market has the attention of at least some of the folks at the Federal Reserve. The minutes of the June meeting revealed that "several" Fed officials think there would be benefits to begin the eventual taper of bond purchasers by reducing the mortgage-backed securities buying faster than Treasuries. The reason for this, in the gentle language of the minutes, is to ease "valuation pressures in housing markets."
At the end of June we got the S&P CoreLogic Case-Shiller National Home Price Index for April showing a gain of 14.6 percent compared with a year prior, the fastest pace on record and acceleration from the 13.3 percent annual gain in March. By all accounts, home prices have continued to accelerate. Indeed, Fed staffers reported to officials that "Housing demand continued to be robust, with construction of single-family homes and home sales remaining well above their pre-pandemic levels and house prices rising appreciably further. The incoming data for this sector indicated that residential investment spending was being temporarily held back in the second quarter by materials shortages and limited stocks of homes for sale."
Residential investment spending is Fed-speak for construction spending. In the jargon of the Fed, building new homes counts as investment but buying an existing home does not. So what the Fed staff is saying is that home prices will likely keep rising because home building has been held back because of shortages and inflation. And even though this week's mortgage applications numbers suggested that the high prices of homes are slowing down sales, Ed Pinto of the AEI Housing Center points out that we're still far above pre-pandemic levels. Indeed, purchase volume was 36 percent above the same week in 2019 and at about the same level as in 2020.
All of this has some people beginning to worry that we may be in a new housing bubble. Won't the panic buying of the pandemic retreat with the virus? Certainly, home prices cannot continue to rise nearly 15 percent a year for very long. But many of the fundamentals that are driving what we've been calling the "flight to the suburbs" for over a year are not going to go away soon. The cities are likely to see further deterioration as schools slump, the shrinking tax base erodes funding for services, and crime escalates. Remote working, even if only part-time, makes longer commutes more tolerable. And people have discovered, once again, that it's nice to live in a house with a yard.
Pinto estimates that we will continue to see double digit levels of home price appreciation through the end of this year and into next year. That sounds about right to us. After that, however, we wouldn't expect a crash or even a modest decline in prices—save perhaps in the hottest markets—but a slowdown in gains. We're likely seeing a good deal of the gains for the future realized now.
– Alex Marlow & John Carney
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