Home prices surge again in July

Home prices surge again in July

*Driven by strong demand and lack of supply, home prices surged 1.6% m/m in July, lifting the yr/yr increase to a record 19.7% on a seasonally adjusted basis according to the S&P CoreLogic Case-Shiller Index (Chart 1). Despite low mortgage rates, rising prices have impacted housing affordability, the National Association of Realtor’s Housing Affordability index has plummeted in 2021, declining 20% since January (Chart 2).

*The soaring home prices have lifted expectations of further home price increases, fueling demand by some prospective homebuyers, they have squeezed demand by some would-be homebuyers, particularly lower income individuals who also face tight housing supply conditions who must rent instead. The higher home values and high demand for rentals is contributing to soaring rents, which rose 2% and 1.7% in July and August respectively (Chart 3).

*House price increases have been widespread across geographic regions, with prices rising across all regions covered by the Case Shiller Home Price Index and FHFA’s Purchase-Only House Price Index. The median sales price of new one-family homes rose 4% in July and flattened in August at $391,000, but are 18% above their level in February 2020.

*Limited supply of new housing is reflected in trends of new one-family home sales: sales of new one-family homes that have not started construction are up 45% since June, while the proportion of total new home sales comprised of houses under construction or not started has risen to 77.6%, its highest level since 2005 (Chart 4).

*While home prices and rental costs are soaring, the costs of shelter in the CPI and PCE price index—their largest component—have risen only modestly, with the cost of shelter in the CPI up 2.8% yr/yr from a recent low of 1.5% (Chart 5). An acceleration in this measure in the next year is expected to add to the inflation measures.

Chart 1: S&P CoreLogic Case Shiller Home Price Index (SA) (yr/yr % change)

Chart 2: NAR Housing Affordability Index

Chart 3: Zillow Observed Rent Index (yr/yr % change)

Chart 4: Composition of New One-Family Home Sales

Chart 5: CPI Shelter (% change yr/yr)

Mickey Levy, mickey.levy@berenberg-us.com

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