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House prices continue to rise, thanks to tight inventories.
The S&P CoreLogic Case-Shiller National Home Price Index, which measures home prices across the nation, rose 2.6% in August from a year ago, up from 1% growth the previous month. On a month-over-month, seasonally adjusted basis, home prices rose 0.9%. Prices have increased on a monthly basis for seven consecutive months. A tight supply of homes for sale is lifting prices, despite the worst housing affordability in decades. The renewed rise in mortgage rates in recent months means that house prices will likely start falling again later this year, albeit at a slower pace than over the past year. Following two years of double-digit price growth, the housing market remains overvalued.
Residential construction rebounded in September, but headwinds remain. Total housing starts rose 7% to 1.358 million annualized units. Single-family starts increased 3.2%, while multifamily starts jumped 17.6% during the month. Regionally, starts increased in the Midwest, South and West, but declined substantially in the Northeast. Building permits fell 4.4%, driven by a 14.3% decrease in multifamily permits, while single-family permits rose 1.8%. Building permits for single-family construction have trended up month after month since January 2022. Yet rising mortgage rates have started to chip away at builders’ confidence in the housing market, with the National Association of Home Builders’ housing market index falling again in October, the third consecutive decline. High mortgage rates, tight credit conditions and a slowing economy will dampen any hopes of a major near-term recovery in residential construction, which will likely remain at its current level until early next year.
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New home sales rose sharply amid a renewed rise in mortgage rates. Sales rose 12.4% in September to a seasonally adjusted annual rate of 759,000 units. This means that despite declining affordability, new home sales are at their highest level since February 2022. The recent strength in new home sales indicates that the higher cost of taking out a new mortgage has discouraged homeowners with low mortgage rates from moving, which has kept the inventory of existing homes for sale near a record low. This has pushed buyers to the new home market, where inventory is at a healthy level of 6.9 months’ worth of sales at the current sales pace. Builders have been able to offer rate buydowns, price discounts and other incentives to buyers. The recent increase in borrowing costs will test builders’ ability to lean on those incentives to sell homes. A recent NAHB survey revealed that around 60% of builders offered sales incentives in October.
Existing home sales have fallen to their lowest level in more than a decade, dropping 2% to 4 million annualized units in September. The low level of sales shows that stretched affordability continues to weigh on demand for existing homes. The average 30-year fixed mortgage rate has risen from 7.07% in August to 7.2% in September. Meanwhile, the inventory of existing homes on the market fell 8.1% from a year ago. This translates to 3.4 months’ worth of supply at the current sales pace, up from 3.3 months in August. A decline in mortgage applications for home purchases in September suggests that sales could fall a little further in the coming months.
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