The S&P CoreLogic Case-Shiller Home Price Index just recorded 20.4% year-over-year growth nationally and a record 21.2% growth for its top 20 city composite, and now you know why my most significant concern for housing was home prices overheating, not crashing like people have warned about from 2012-2021.
From S&P: The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 20.4% annual gain in April, down from 20.6% in the previous month. The 10-City Composite annual increase came in at 19.7%, up from 19.5% in the previous month. The 20-City Composite posted a 21.2% year-over-year gain, up from 21.1% in the previous month… Nine of the 20 cities reported higher price increases in the year ending April 2022 versus the year ending March 2022.
This data line lags the current housing market as it’s a few months old. Since the summer of 2020, I have talked about how to cool down home sales: we need the 10-year yield to break over 1.94%. This happened in March, and thankfully so. Imagine if mortgage rates didn’t rise this year. We are still showing double-digit home-price growth trends in the recent data as it takes time for higher mortgage rates to really increase supply back to normal levels.
However, as you can see below, the damage has been done with home-price growth. I developed a specific home-price growth model for the years 2020-2024 which said that if home-price growth grew at 23% for five years we would be fine, with total housing demand —both new and existing homes together — getting to 6.2 million or higher.
Well, guess what? America did a Hulk Smash on my model in just two years. Whenever you see vertical home-price growth over a period of time, it’s never a good thing. This either means you had a massive supply shortage or you had a credit boom.
Since 2014, we’ve not seen the credit housing boom that we saw from 2002-2005. Even today, the MBA purchase application index is below 2008 levels. The housing market can’t replicate the type of massive credit expansion we saw from 2002-2005, so the price-growth story has more to do with inventory collapsing to all-time lows.
It’s not just home price inflation either; shelter rental inflation has also taken off. When supply is low and demographics equal demand, don’t make it complicated, folks. People always need somewhere to live. If they’re employed, they’re either buying a home or renting.
Still, we can see the damage being done in the past few years as total housing inventory collapsed to all-time lows, and we are working our way back to just the historically low levels of inventory of 1.52 – 1.93 million.
For some time now, I have been focusing on that 1.52-1.93 million total housing inventory data as that is the level of inventory that would change my thesis that this is a savagely unhealthy market. The reality is that inventory collapsed to all-time lows right when our most prominent demographic reached their peak home-buying age. I believe once we get between 1.52-1.93 million, the housing market can be sane again, even though those levels were the historically low levels of inventory going back to 1982. I present my case for how we can break into that range next year on a podcast with Altos Research.
Hopefully, you can understand why we needed higher rates last year and early this year to try to cool the price-growth market. The reality is that home sellers and builders had too much pricing power. Also, certain investors felt no fear post-2020. The percentage of home flipping has grown since 2020, even beyond the housing bubble years, and we see some growth in total investor demand, however, as seen below, Institutional investors are still a small percentage of homebuyers.
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