Case-Shiller reaches all-time high; FHFA and rental vacancies jump

Standard and Poor’s released the latest CoreLogic Case-Shiller indexes for the month of August 2023.

On aggregate, residential prices showed an increase in both annualized and monthly terms.

The 20-city S&P CoreLogic Case-Shiller improved by 2.15% YoY in the month of August, showing the fastest hike in seven months, i.e., since 2.60% in January 2023.

This considerably outperformed market estimates of 1.6% YoY as reported by TradingEconomics.com.

In addition, the improvement reinforced the 0.2% YoY increase in July 2023 following four consecutive months of declines.

The sharpest gains were seen in Chicago, New York City, and Detroit which increased by 5.0%, 5.0%, and 4.8%, respectively.

However, Las Vegas, Phoenix, and San Francisco exerted a drag and recorded price decreases of (-)4.9%, (-)3.9%, and (-)2.5%, respectively.

The 10-city index rose 3.0% YoY, while the national index was up by 2.6% YoY.

Year-to-date, the 10-city, 20-city, and national averages increased 6.7%, 6.3%, and 5.8%, respectively.

It should be noted that the index is considerably lagged and includes contracts signed much earlier in the year.

Monthly data

On a monthly basis, the Case-Shiller index decreased to 0.35% from 0.6% in the latest report, i.e., July 2023.

Having peaked at 1.7% in April 2023, the index has seen four consecutive months of deceleration and has slid under the long-term average (i.e., from 2000-2023) of 0.42%.

However, this was in line with market forecasts of 0.4% as reported by TradingEconomics.com.

The 10-city metric improved by 0.37% MoM while nationally, home prices headed 0.43% higher.

Interestingly, the annual measure is now showing signs of sustained improvement, having logged two positive consecutive readings, while the monthly indicator is continuing to moderate while positive.

It is worth noting that annualized measures tend to be considerably less noisy than monthly statistics.

After seasonal adjustment, the national index increased by 0.9%, while the 10-City and 20-City Composites posted a 1.0% increase each.

Craig J. Lazzara, Managing Director at S&P DJI, highlighted the strength of the market, writing,

One measure of the strength of the housing market is the relationship of current prices to their historical levels…On that dimension, it’s worth noting that the National Composite, the 10-City Composite, and seven individual cities (Atlanta, Boston, Charlotte, Chicago, Detroit, Miami, and New York) stand at their all-time highs…On a seasonally adjusted basis, prices increased in 19 of 20 cities in August…

On a regional basis, the Midwest continued to show the sharpest growth at 3.9% YoY while the Southwest was the weakest at (-)0.8% YoY.

Overall, the strength in residential real estate prices is quite striking considering the Fed’s continued hawkishness and expectations of a potential rate hike before the end of this year.

However, it is also true that with mortgages going through the roof, many would-be buyers have been turned off from investing in a home.

Yet, Lazzara believes,

…after years of very low rates, it seems to have suppressed supply even more.

For builders, headwinds continue to accumulate including high rates, tighter financial conditions, and an ongoing shortage of workers as well as higher insurance costs.

Despite the 30-year mortgage standing at 7.92% as of 30 October 2023, the subdued housing inventory has kept the market elevated.

For instance, existing home inventory stands at 3.3 months compared to healthy levels of 4-6 months.

Thus, without the severe onset of broad-based economic weakness, the residential sector may continue to show price increases due to the low availability of supply. 

FHFA data

The Federal Housing Finance Agency (FHFA) data which was also released earlier today showed a rise of 5.6% in August 2023 on a YoY basis, improving from 4.7% in July 2023.

While outperforming market expectations of 4.5% YoY, this marked the fourth consecutive month of upward momentum and the highest increase since December 2022.

On a monthly basis, FHFA data was up 0.6%, higher than expectations of 0.5% MoM.

As with the Case-Shiller, regional disparities remained, with the South Atlantic division seeing a contraction of (-)0.2% MoM while the Pacific and East North Central divisions improved by 1.1% MoM.

Vacancies

As per the Census Bureau, rental vacancy for Q3 2023 jumped to 6.6% from 6.0% in the previous year.

This was also an increase from 6.3% recorded in Q2 2023.

Homeownership remained steady at 66.0%, edging higher from 65.9% in Q2 2023.

The homeowner vacancy rate declined to 0.8% in this quarter from 0.9% during the corresponding quarter last year.

The estimated total housing inventory for Q3 2023 rose by 1,635K from 143,923K twelve months earlier to 145,558 K.

However, it should be noted that some economists have concerns about the accuracy of the data collection and analysis.

Near-term volatility in mortgage rates

The national index for Case-Shiller increased to a new all-time high, even though disparities remained across major cities.

This indicates that broadly speaking, the Fed’s hawkish narrative has not dented price momentum in residential units.

Although elevated mortgage rates have certainly hurt buyer sentiment, low supply has meant that price pressures continue to build.

Ahead of the Fed’s FOMC announcement tomorrow, CME FedWatch data indicates virtual unanimity that rates will stay elevated but unchanged.

However, the data suggests a considerable 29.1% probability of an increase to 5.50%-5.75% in the December meeting.

During the coming week, scheduled economic releases could lead to significant near-term volatility in mortgage rates.

On Wednesday, data to watch includes the JOLTs report, the Fed’s announcement, and the ISM release.

This will be followed by Thursday’s jobless claims numbers and Friday’s employment situation report consisting of the latest payroll data and the unemployment rate.

Mortgage rates would likely see support or relative weakness if the upcoming jobs report concurs with the Fed’s chosen narrative in tomorrow’s meeting.

If the jobs report comes in lower than expected, while the Fed’s announcement suggests a dovish interpretation, mortgage rates will likely begin to slip.

However, if a hawkish move from the Fed combines with a strong jobs report, expect mortgage rates to approach 8.0%.

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