House price indexes for November: up like a rocket, down like a feather

– by a New Deal Democrat

As I have said many times over the last 10 years, housing prices lag sales. Housing permits peaked in early 2022, with starts following a few months later.

This morning, the FHFA and Case Shiller home price indexes for November showed extended declines from their seasonally adjusted peak in June 2022 and also continued to decline sharply from their year-over-year growth peak, foreshadowing a similar decline in the shelter CPI by the end of this year.

Here’s what both look like normalized to 100 at their June peaks:

Since then, the FHFA index is down -1.0% and the Case Shiller National Index is down -2.5%.

Between June 2020 and June 2022, the FHFA Index increased by an average of about 1.5% per month! Since June, it has only decreased by -0.3% per month. The Case Shiller National Index also rose by an average of +1.5% per month through June 2022 and has since declined by an average of -0.5% per month.

In other words, post-pandemic home prices skyrocketed, but to date they’ve only drifted down like a feather.

On the other hand, year-over-year comparisons get much better. At their peaks in the spring of 2022, both house price measures were up about 20% year over year. As of November, the FHFA was down +8.2% y/y and the Case Shiller index was +7.7% y/y:

At this rate, year-over-year prices will drop sometime this spring.

But when measured by the ability of households to make a down payment (leaving aside mortgage rates for that purpose), as shown in the chart below, which normalizes house prices by the average weekly wage for unsupervised workers, house prices still are still close to their all-time highs:

Finally, as I’ve been emphasizing for over a year, house prices have been leading the CPI measure of owner-occupier equivalent rent by 12 months or more. Here is the most recent 20-year history of the year-over-year change in the Case Shiller index (blue, /2.5 for scale) versus the equivalent annual owner-occupier rent (red):

The good news is that whether we measure by reference to the FHFA or the Case Shiller indices, the measure of CPI for housing is on track to fall to around 3.0%-3.4% on an annualized basis by the end of 2023 – very much in within what should be the Fed’s comfort range.

The bad news is that we likely have a few more months before the official shelter CPI measure peaks, possibly at 8.0% or higher. So far, the Fed seems to be paying much more attention to current OERs than projected home prices.

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