The S&P/Case-Shiller National Home Price Index shows prices of existing single family homes rising 5.3% annually in the last few months, well above the rate of inflation. Recent comments cite the low inventory of homes for sale as a leading factor in higher prices. Housing markets are local and some communities may be seeing house prices driven up by a shortage of homes for sale. However, nationally low unemployment; low mortgage rates and an improving economy outweigh inventory issues.
The chart shows the S&P/Case-Shiller National Home Price Index (red, numbers of the right hand scale), sales of existing homes at annual rates (dark blue, in millions of houses per year on the left hand scale) and the inventory-sales ratio or months-supply (green, also on the left).
The current level of months-supply at 4.7 is much lower than the housing boom-bust era of 2006-2012, but it is almost the same as the 1997-2005 period, the last time we might recall a somewhat normal housing market. Looking farther back to the 1990-1996 period the months-supply was much higher. However, then the economy was coming off an earlier housing boom-bust. In 1990-1991 the Fed raised interest rates, housing slowed and inventories surged. Given history, the months-supply isn’t the prime factor in rising home prices.
Since 2010, home prices and sales have risen together while the months-supply has stayed in a range of 4 to 4.8 months. The availability of homes for sale has kept up with rising prices and expanding sales. If supply isn’t the cause, then factors outside of the housing market are likely drivers of rising house prices. Mortgage rates, which have fallen from about 5% to 3.5% for 30-year fixed rate loans since 2010, are contributing to rising home prices. Improved consumer confidence and the decline in unemployment are also positive factors behind home prices.
If the Fed pushes interest and mortgage rates up over the next year or two, and if the unemployment levels off as it approaches full employment, the rise is home prices is likely to be tempered. The months-supply figures will probably settle between 4 and 5 months.
The next S&P/Case-Shiller Home Price Index report is due on May 31st and will reveal if prices are continuing to climb at better than a 5% pace.