Is the disinflation in repeat home sales prices ending?

 

 - by New Deal democrat

There may be a new, slightly accelerating, trend developing in house prices — or it may just be noise. The former, of course, would not be good news for inflation. In any event, let’s take a look.

As per my usual preliminary comment, while existing home sales are about 90% of the market, new home construction is much more important for the economy. While the current cycle may have dispelled the notion that “housing *is* the economic cycle,” it is nevertheless an important component of the long leading indicators. But existing home sales are an important determinant of pricing equilibrium in housing, and the repeat home sales indexes, by S&P Case Shiller and the FHFA, are the best indicator of same.

The seasonally adjusted Case-Shiller National index (blue in the graphs below) declined once again, this month by less than -0.1% for the three month period ending in May, while the FHFA index (red) rose 0.3% [Note: FRED has not yet updated the Case Shiller data]:

Last month I noted that “there is something of a divergence showing in the YoY comparisons of the two national indexes,” as the Case Shiller national index had increased less than 1% YoY, while the (often slightly more leading) FHFA Index had accelerated to a 2.0% increase. This year the Case Shiller YoY comparison increased to 1.1%, and the FHFA increased to 2.2%:

As you can see, the red line has stopped declining and in the last few months has increased slightly. The blue line also appears to be ending its decline. As noted at the beginning of this post, this could be the sign of an incipient reversal of trend, but as of yet it could just be noise. 

Nevertheless, as shown in the graph below, by historical standards these are quite low increases. Additionally, while I haven’t shown it in the graph, last week existing home sales showed an increase of 1.8%. Given the lead time between house prices and the official CPI shelter component of owners’ equivalent rent (gold), here is an update of that historical comparison [Note: CPI*2.5 for scale]:

Keep in mind that the oficial CPI metric for shelter has been complicated by the “shelter kludge” that the Census Bureau performed last November as a result of the extended government shutdown. I concluded last month that  “I continue to believe that the repeat sales indexes point to continued slow deceleration in the shelter inflation in the CPI.” The increasing trend in YoY comparisons in the repeat sales indexes, if it is signal and not noise, calls that into question.

Finally, let’s take a look at how new and existing home prices as measured by repeat sales compare with households’ buying power (blue in the graph below), by adjusting for average hourly nonsupervisory earnings in the graphs below (median household income would be better, but is updated only once a year, and average wages are reasonably close for these purposes). I’ve also included the same metric for median new home prices, both monthly (thin, red) and quarterly (thick) to cut down on noise. Since the FHFA is reported as an index, I’ve used the most recent median price for existing homes as a substitute:

The bad news continues to be that existing houses remain more unaffordable than at any time before the pandemic, although they’ve backed off slightly from their highs; and indeed the median existing home is now more expensive than the median new home. Contrast that with new home prices, where builders have taken steps to meet the market. Until a lot more existing homes go on the market, this discrepancy is not going to be resolved.