The month of June marked the fifth consecutive month of rising home prices, fueled by persistent demand outpacing supply and a backdrop of elevated mortgage rates.
In June, the S&P Case-Shiller US National Composite home price index exhibited a 0.7% increase compared to May on a seasonally adjusted basis. This mirrored the 0.7% rise recorded in the previous month. The index currently stands a mere 0.02% below its record peak exactly one year ago.
The 20 largest US cities also experienced a surge in home prices, registering a strong 0.9% month-over-month gain in June, surpassing the Bloomberg consensus estimate of a 0.8% increase.
“With 2023 halfway through, the National Composite has climbed 4.7%, slightly exceeding the median annual increase over more than 35 years of data,” noted Craig J. Lazzara, Managing Director at S&P DJI. However, he also acknowledged the potential impact of rising mortgage rates or broader economic weakness on market gains, despite the current optimistic perspective.
Comparing year-over-year figures, the national housing index remained stable in June, an improvement from a 0.4% decline the previous month. On a non-seasonally adjusted basis, the 20-city index experienced a 1.2% decrease.
Among the 20 cities, Chicago, Cleveland, and New York reported the highest year-over-year gains in June at 4.2%, 4.1%, and 3.4%, respectively.
Dr. Selma Hepp, Chief Economist at CoreLogic, emphasized that the most notable acceleration in home prices occurred in markets that maintained relative affordability throughout the pandemic, displaying lower volatility due to shifts in household migration. These markets, primarily located in the Midwest and New England, are now catching up with their more expensive counterparts.
The index employs the repeat sales method to gauge home price growth, utilizing data from properties that have been sold at least twice to accurately measure changes in each property’s value. This approach is based on a three-month moving average.
Rising Mortgage Rates
Mortgage rates began to rise in June, averaging 6.71% after staying below 6.5% for the preceding two months. This uptick weighed on home sales as both existing and new home sales declined in June, partly due to affordability concerns.
Despite the decline in transactions and the use of a three-month moving average, home prices were not impacted enough to reverse their upward trajectory as mortgage rates increased.
This double challenge of decreasing affordability and rising mortgage rates is presenting a significant hurdle for prospective homebuyers. For example, a median-priced home of $406,700 with a 20% down payment purchased at June’s rates costs buyers $727 more than it did two years ago when mortgage rates were at 3.02%.
Forecasting Prices
Mortgage rates have continued to rise, reaching 7.23% recently, the highest point since June 2001, as the Federal Reserve remains committed to achieving its 2% inflation target.
This scenario adds complexity to predicting the future trajectory of home prices. While higher rates contribute to the “lock-in effect” that deters homeowners from selling, thus constraining inventory and sustaining prices, the elevated rates could price out potential buyers, potentially necessitating price reductions to stimulate demand.
The recent five-month streak of price increases from February to June has prompted analysts to revise their home price forecasts. For instance, the Goldman Sachs housing team now anticipates a 1.8% rise in home prices this year, an improvement from the 2.2% decline predicted earlier.
However, this adjustment implies that “home prices will remain roughly unchanged through year-end and then return to trend growth levels in 2024,” stated Vinay Viswanathan, a Fixed Income Strategist at Goldman Sachs.
CoreLogic’s projection estimates a 4.3% increase in home values from June 2023 to June 2024.
“While home prices have maintained strength in 2023, elevated mortgage rates complicate matters for potential homebuyers, a trend likely to limit additional price gains for the remainder of the year,” explained CoreLogic’s Dr. Selma Hepp.
She added, “Home prices are still anticipated to reaccelerate and achieve a mid-single-digit growth rate by year-end.”