- by New Deal democrat
The current economic cycle has not just, as I explained yesterday, busted the infallibility of the inverted yield curve as an indicator, it has also blown up Prof. Edward Leamer’s theory “housing *is* the economic cycle.” But while no metric is perfect, it remains the case that housing is an important long leading sector, and house prices are an important component of the economy, particularly as they affect the official CPI measure downstream (not to mention their impact on ordinary buyers and sellers). And the repeat home sales indexes, by S&P Case Shiller and the FHFA, are the best indicator of prices in the 90% of the market that is existing home sales. same.
In the last few months, prices in both indexes have appeared to be firming, and that continued to be the case in this morning’s reports. After several months of decline, the seasonally adjusted Case-Shiller National index (blue in the graphs below) rose 0.1% for the three month period ending in July, while the FHFA index (red) rose 0.3%. Significantly, the FHFA index, which typically slightly leads the Case Shiller one, has been relatively “hot” compared to the latter. [Note: FRED has not yet updated the Case Shiller data]:
Earlier this year 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 FHFA Index had accelerated to a 2.0% increase. In the past several months, however, the Case Shiller index has also “warmed up” somewhat. In July, on a YoY% basis, the Case Shiller national index increased from 1.6% to 1.9%, a 12 month high, and the YoY% change in the FHFA index also increased from 2.3% to 2.6%, a 10 month high:
In stark contrast, as I wrote last week, the three month average of the YoY% change in the median price for new homes has declined to -2.6%, the biggest three month average YoY decline in two years. This is almost certainly a byproduct of homebuilders “meeting the market” while individual home sellers continue to resist taking losses (although I note a number of stories in the past month indicating that the percent of price reductions in existing homes for sale has been increasing dramatically).
Last week I wrote that, deflated by average weekly earnings, the purchase price for new homes was less in “real” terms than at any point in the last 15 years except for one month during the COVID lockdowns. Applying the same deflator, existing homes as measured by both the Case Shiller and FHFA indexes, have become “less unaffordable” over the past 24 months. In July, average weekly earnings increased 0.3%, meaning that the “real” Case Shiller index declined further, while in “real” terms the FHFA index remained steady. The former has declined -4.6% in real terms since its recent peak in January 2025, while the latter has declined -3.1%. Nevertheless, as I wrote last month, it will take considerably more inventory on the market to bring existing homes down to just their average affordability compared with the past 30 years.
Finally, a reminder that the Fed’s interest rate hike and the similar increase in mortgage rates suggests that the recent equilibrium in the market is probably going to be yanked to the downside.
