Economists may be keeping an eye out for a housing market crash ahead of the release of the crucial upcoming Case-Shiller Home Price Index report, due Dec. 26. In a year filled with ups and downs in the housing market, next week’s report may offer some telling insight into where real estate prices are heading into the new year.
So, what do you need to know about next week’s major housing report?
Well, next week’s report will highlight prices both nationally and in the 20-city index for October. As such, the report won’t reflect the impact of the recent decline in mortgage rates. Indeed, the report will show how housing prices responded to near 8% mortgage rates. Though, if recent history is any indicator, it may not affect home prices nearly as much as many would hope.
If you recall, the September Case-Shiller report, released Nov. 28, showed national home prices were up 3.9% from the same month a year earlier, an increase from the 2.5% annual gain in August. This happened even as mortgage rates trended around 7.2%.
In the 20-city index, things were a bit more varied. While Detroit, San Diego and New York each enjoyed annual price gains of more than 6%, Las Vegas, Phoenix, and Portland, Oregon each reported lower prices than a year prior.
“We’ve commented before on the breadth of the housing market’s strength, which continued to be impressive,” Noted Craig Lazzara, managing director at S&P DJI. “Although this year’s increase in mortgage rates has surely suppressed the quantity of homes sold, the relative shortage of inventory for sale has been a solid support for prices.”
Home Prices Still Elevated Despite High Mortgage Rates
Despite the injurious effect of high mortgage rates on housing demand, home prices have shown little weakness this year. Indeed, year-to-date home prices are up 6.1% nationally, far higher than the median full-year increase in the 35-year history of the index.
It appears the supply side has propped up prices. Indeed, despite high prices and mortgage rates pricing out an ever-growing population of would-be homeowners, an inventory crisis in the U.S. has continued pushing home prices up even without demand.
Currently, the total housing inventory in the U.S. is about 1.13 million units. For context, the metric’s historical average from 1982 was about 2.3 million units.
The simple lack of available homes for sale has forced prices upwards, even as the housing market faces its coldest buying conditions in decades.
It’s worth noting that rent prices have actually eased a bit this year. The national median rent dropped 0.9% in November from October, per Apartment List. Year-to-date rent prices are down 3.5% from their peak in August 2022.
Housing Market Crash Possibility Looms as Rates Fall
Housing may be in for a reversal, however. Mortgage rates have dropped notably in recent weeks as interest rate traders increasingly price in rate cuts coming in 2024, something the Federal Reserve confirmed at its policy meeting last week.
As mortgage rates fall, one of two things will happen. Likely, lower lending rates will bring potential buyers back into the market, pushing prices up in the process. Or, falling mortgage rates will bring more pandemic-era sellers into the market, finally able to secure a new mortgage for a more acceptable rate, easing some supply constraints and actually bringing prices lower.
The former is traditionally what happens when rates fall. The latter is a unique possibility spurred on by pandemic economic conditions that made many homeowners reluctant to sell due to their fear of being unable to get a new mortgage at a decent rate.
This is further supported by strong growth in housing starts data, showing home builders are returning to single-family homes. While factors like labor, lots, and building materials remain roadblocks to construction at the same level as in the early 2000s, even mild improvements in supply could yield meaningful changes in home prices.
Looking Ahead to Next Year
The new home market has been extraordinary in 2023, and I think heading into 2024, we’re going to have the golden age of new home construction,” said Howard Hughes Chief Executive David O’Reilly in an interview with CNBC on Wednesday. “Because not only can you pick size, location … but national home builders have been able to buy down mortgage rates and offer a lower mortgage rate for buyers,” he added.
Housing is typically one of the most rate-sensitive industries. The real estate space was one of the earliest casualties of the Fed’s rate hike cycle. Expect them to be one of the first to recover as rates finally come down.
While this is unlikely to result in a full-blown housing market crash, expect the real estate space to change in meaningful, potentially unexpected ways in the new year.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
