– by a New Deal Democrat
The Case Shiller and FHFA home price indexes were updated through July (technically, the May-July average) this morning. I usually don’t pay much attention to them, but this year they are very important in confirming a peak in house prices.
Although the FHFA index is seasonally adjusted, the Case Shiller index is not, so the best way to compare them is on an annual basis. Here are the year-over-year changes for the past 2 years each through June (FRED has not yet released today’s numbers):
Remember, my rule of thumb for non-seasonally adjusted data is that a peak is most likely when year-over-year earnings fall to only 1/2 of their peak over the past 12 months. the annual peak in the Case Shiller index was +20.6% in March and April. The peak for the FHFA index was 19.3% in July 2021. By that standard, although both slowed to 12-month lows of +15.8% and 13.9%, respectively, neither actually turned lower , although the FHFA index is closer. And since the FHFA tends to turn slightly ahead of the Case Shiller index, this strongly suggests that the sharp year-over-year slowdown in the Case Shiller index will begin within a month or two.
However, as I said above, the FHFA purchases-only index *is* seasonally adjusted, and this index, after consistently rising 1% or more from June 2020 to May 2022, fell -0.1% in June and -0.6% in July :
So the seasonally adjusted data in the FHFA index shows that prices peaked in May.
New home sales were also reported this morning. I’ll briefly comment on the sales below, but let’s stick to the prices first. They are also not seasonally adjusted. The average new home price increased “only” +8.0% year-over-year as of August, down from +24.2% last August:
This confirms that new home prices have likely peaked as well.
In addition, the maximum average year-over-year change for existing homes over the past 12 months was last December at 15.8%. As of August, the year-over-year increase was +7.7%, meaning these prices have also likely peaked.
Aggregating the four home price metrics, median prices for both new and existing homes appear to have peaked this summer. The FHFA index suggests that the peak has occurred this summer as well, or is about to occur. Only the Case Shiller index is probably a few months away from its peak.
Finally, on prices, as I’ve written many times over the past 9 months, the CPI’s measure of housing, “equivalent owner rent” – which is about 1/3 of the entire index – lags actual house prices by about year or More ▼. Here are the year-over-year changes in house price indices relative to OER (*2 for scale) over the past 20 years:
In August, the year-over-year increase in OER continued to accelerate. Since in the past episodes of significant declines – 2001-2, 2005-6 and 2019-20 – OER peaked about a year after house price indices, I suspect we will continue to see OER accelerate through the winter or at least until the end of this year.
Also, in a few months I expect the annual increase in the FHFA index to be less than that of the OER – meaning that if the Fed continues to raise rates at this point, it will be chasing a retreating phantom.
Turning briefly to new home sales, they rose sharply from July’s 6-year low of 532,000 year-on-year to 685,000, a 4-month high — but still well below the overall pace of the past few years:
This data series has been heavily revised, so we’ll see if the increase survives next month. There is no reason to suspect a change in the overall downward trend.