Almost exactly ten years after the last housing bubble burst, unleashing a dramatic crash in US real estate prices - something Ben Bernanke had said in 2005 would be unprecedented, and is thus not a risk factor - today Case Shiller reported that as of September, its Index covering all nine U.S. census divisions, surpassed the peak set in July 2006 as the housing boom topped out, and in doing so the average home price has now climbed back above the record reached more than a decade ago, bringing to a close the worst period for the housing market since the Great Depression.
The average home price for September was 0.1% above the July 2006 peak in nominal terms. The National index reported a 5.5% annual gain in September, up from 5.1% last month. The 10-City Composite posted a 4.3% annual increase, up from 4.2% the previous month. The 20-City Composite reported a year-over-year gain of 5.1%, unchanged from August.
The gains have been unequal: just 34 of the largest 100 metropolitan areas have seen starter home prices recover to their previous peak, while 56 areas have seen high-end homes reach or surpass previous highs, according to home-tracker Trulia, confirming that the upper end of the market has been instrumental for the "recovery."
“The new peak set by the S&P Case-Shiller CoreLogic National Index will be seen as marking a shift from the housing recovery to the hoped-for start of a new advance” said Case Shiller's David Blitzer said. “While seven of the 20 cities previously reached new post-recession peaks, those that experienced the biggest booms -- Miami, Tampa, Phoenix and Las Vegas -- remain well below their all-time highs. Other housing indicators are also giving positive signals: sales of existing and new homes are rising and housing starts at an annual rate of 1.3 million units are at a post-recession peak.
It is also worth noting, that when adjusted for inflation, the index remains about 16% below the 2006 high.
The new record caps a four-year recovery from the trough of 2012, when prices sat 27% below the peak after a crash that caused more than nine million American families to lose their homes.
As a reminder, the data is as of September, when interest - and mortgage rates - were stuck near all time lows. A lot has happened since then, most notably the advent of Trumpflation and a surge in mortgage rates. As we reported over the weekend, the recent "Increase In Mortgage Rates Has Shocked Consumers", once again putting the US housing market in peril.
For now, however, looking at 2 month old data, "the sky is the limit" as the WSJ puts it: while housing has lagged behind some sectors of the economy in recent years, there are signs of gaining strength: Single-family housing starts rose 11% in October, according to the Commerce Department, and the number of starts remains well below the historical average, suggesting there is room for acceleration.
Likewise, the share of first-time buyers rose to 33% in October from 31% a year earlier, inching closer to the historical average of 40%. The lack of first-time buyers had been a drag on the market because, without a deep pool of ready buyers of starter homes, owners of those homes have a harder time trading up.
Robert Shiller, an economist at Yale University who co-developed the index, said the record provides a significant psychological boost for homeowners, some of whom are finally seeing their homes above water after four years of recovery.
“It creates an atmosphere that the sky is the limit,” he said. Some economists are surprised by the magnitude of the home price gains in recent years given the more moderate pace of wage growth.
Others, pointing the discrepancy between the 5% annual growth in home prices and the far more subdued wage growth in recent years, are less optimistic: “It’s not clear with the degree of [economic] growth that we’ve had that we should have expected prices to rise this much,” said Doug Duncan, chief economist at mortgage company Fannie Mae. “We have a caution light on.”
Of course, it is easy to explain the delta when considering the historic debt bubble of the past decade. One reason home prices have risen so quickly is a prolonged period of ultra-low interest rates. However, as the WSJ again warns, rates have jumped about half a percentage point since earlier this month, and while they remain near historic lows, a sustained rise could slow price gains particularly in expensive coastal markets.
Putting the move in context, last week housing expert Mark Hanson warned that for end-buyers who rely on mortgages to purchase a house, "Houses have never been more expensive to end-user, mortgage-needing shelter buyers. The recent rate surge crushed what little affordability remained in US housing. It now it requires 45% more income to buy the average-priced house than just four years ago, as incomes have not kept pace it goes without saying. The spike in rates has taken "UNAFFORDABILITY" to such extremes that prices, rates, and/or credit are now radically out of scope. "
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But even before the recent spike in rates, not all was as rosy as the headline would make it seem: about 12% of homeowners who have a mortgage now owe more than their home is worth, down from more than 30% at the bottom of the market, according to Zillow. “Personally I wouldn’t be throwing confetti because my house is worth what I paid for it back eight years ago,” said Nela Richardson, chief economist at real-estate brokerage Redfin.
Still, in many parts of the country that were battered by the crash, a return to near-normal conditions has come as welcome relief, and faster than many expected. The median home value in Lehigh Acres, Fla., on the eastern edge of Fort Myers, bottomed at about $61,000 after peaking at $230,500 in July 2006, according to Zillow. Today, the median home price has risen to about $140,000, a level officials say is closer to what the area can sustain in an era of tight mortgage credit. In fact, Fort Myers now has a shortage of starter homes, said Mayor Randall Henderson.
In short: today's report was good news for housing; however the real test for the US housing market will be what happens as the recent "renormalization" in rates takes hold; absent a similar rebound in wages, the latest all time high in home prices will prove to be short lived. Finally, one can't ignore the political component: housing peaking just as Obama leaves. We have a feeling it will have a far more turbulent time under president Trump...