Real Estate: Home Prices Still Rising Rapidly

Kiplinger's Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or for more information.

If you already subscribe to the print edition of the Letter, click here to add e-mail delivery and the digital edition at no extra cost.

Housing starts fell in September as strong demand continued to run up against supply constraints. Total starts fell 1.6%, to 1.555 million annualized units. Multifamily starts accounted for the month’s decline, dropping 5%. Single-family starts were unchanged. Total starts were up 19.5% compared with September of last year. The residential construction market is experiencing shortages in essential building materials and skilled construction workers. Hurricane Ida also played a role in the monthly drop. The NAHB/Wells Fargo Housing Market Index rose to its highest level in three months, indicating that builders remain confident in their ability to sell every home they build.

New-home sales rose for the third consecutive month in September. Sales of new single-family homes jumped 14% to a seasonally adjusted rate of 800,000. Sales rose in the Northeast, the South and the West, but declined slightly in the Midwest. A lack of inventory in the existing-home market is pushing some prospective buyers to the new-home market, where inventory is relatively high. At the current sales pace, it would take 5.7 months to run out of the present supply of new homes for sale. The inventory of new homes improved again in September. Much of the inventory gain, however, has been in homes that have not yet been started or homes that are still under construction. Prices are still rising rapidly. On a year-over-year basis, the median new-home price rose 18.7% — a more moderate increase than the 23.3% hike in the previous month, but still a sizable annual increase.

Existing-home sales rose, but the improvement is likely to be short-lived. They jumped 7% to a seasonally adjusted 6.29 million units — an eight-month high. Sales are down 2.3% compared with a year ago, but up around 17% compared with their pre-COVID-19 level two years ago. The inventory of homes available for sale fell 0.8% from the previous month and is down 13% from a year ago. The supply of more-affordable homes is particularly tight. Despite elevated prices and lean inventories, demand for homes is still robust. One of the indicators of strong demand is that homes continue to sell very quickly. They typically remained on the market for 17 days in September 2021, down from 21 days in September 2020. With mortgage rates still rising, inventory close to record lows, and home-buying sentiment at multidecade lows, sales are likely to trend down over the next few months.

Home prices continue to reach new records. The S&P CoreLogic Case-Shiller National Home Price Index rose 19.8% in August from a year ago. With inventories of existing homes still very low, house prices have risen steadily for 13 consecutive months. Housing demand, however, will cool over the next few months. The Case-Shiller index reports with a two-month delay, so it doesn’t reflect the slowdown in home-price gains in recent weeks. Mortgage rates have increased recently, which should further slow home-price gains by raising monthly payments for home buyers.