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New home sales moderate while home prices zoom up
*New single-family home sales declined for the third consecutive month in March to 760k annualized (-8.6% m/m), reflecting elevated home prices and a sharp increase in mortgage rates since the turn of the year (Chart 1). The decline in new home sales paired with a modest 15k increase in the number of new single-family homes available for sale at the end of March contributed to a jump in the months supply of existing homes to 6.4 months, the highest level since September (Chart 2).
*While housing market activity is likely to moderate as the Fed raises rates and financial conditions tighten further, expectations of a sustained increase in home prices and favorable underlying demographics should support home prices.
*Nationally, home prices accelerated in February, increasing 19.8% yr/yr according to the S&P CoreLogic Case-Shiller Home Price Index (Chart 3), while the 20-City Composite Home Price Index, a measure of home prices in major metropolitan areas, jumped 2.4% m/m on a seasonally adjusted basis, lifting the yr/yr increase to 20.2% - a sharp acceleration from 19.1% in January. The slight divergence in the national and 20-City Composite index could reflect shifting mobility and migration patterns as the effects of the pandemic ebb and people return to cities and offices.
*New home prices have soared over the course of the pandemic. The median new single-family home sold for $437k in March, a 31% increase relative to February 2020 (Chart 4). Over that same period, the cost of building a new-single family home has increased 28%, and suggests that amid strong demand and limited supply, builders have had the flexibility to pass on increased costs to homebuyers. With demand for homes easing, reflected in significant declines in mortgage origination and sales volume in recent months, the ability and willingness of prospective homebuyers to absorb these increased costs will be tested.
*Robust increases in home prices and a jump in mortgage rates (the average 30-year fixed mortgage rate is now above 5%, Chart 5) paired with strong nominal wage growth has boosted market rents and driven some potential homebuyers onto the rental market, accentuating rental market pressures (Chart 6). Changes in market rents and home prices tend to impact measures of shelter inflation, the largest component of the Consumer Price Index, with long lags (12 – 16 months). Consequently, the increase in home prices and market rents over the last 18 months will likely keep core and services inflation elevated through 2022, even as goods prices ease.
*Expectations of home and, particularly, rent appreciation are elevated. According to the Federal Reserve Bank of New York’s SCE Housing Survey, the median expectation of home price appreciation is 6% over the next year, but longer-term expectations are more modest, with the median respondent expecting a 3% annualized increase five years from now. In contrast, near-term expectations for rents are significantly higher. The median expectation for rent appreciation is 8% in the next year while the average respondent expects an 11% increase in rents, with five-year ahead expectations falling to 5% annualized. These expectations, particularly for rents, are likely to exert upward pressure on household wage demands and inflationary expectations, and may prompt some to cut back on discretionary expenditure.
Chart 1. New Home Sales
Chart 2. Months Supply of New Single-Family Homes
Chart 3. S&P CoreLogic Case-Shiller Home Price Index (National)
Chart 4. Median New Single-Family Home Price
Chart 5. 30-Year Fixed Mortgage Rate
Chart 6. Zillow Observed Rent Index
Mickey Levy, mickey.levy@berenberg-us.com
Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com
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