U.S. Economic Brief || Home prices jump up in January

Home prices jump up in January

*Home prices rose 1.8% m/m in January following a 1.4% m/m increase in December according to the S&P CoreLogic Case-Shiller Home Price Index, lifting their yr/yr increase to 19.2%, an acceleration from 18.9% in December (Chart 1). The surge in home prices has been underpinned by robust demand amid extremely limited inventories - the average number of days a listing spends on the market has halved since the start of the pandemic to 17 days.

*Mortgage rates gapped up in January. 30-year fixed rate mortgages averaged 3.6% over the month (Chart 2) and have risen substantially further in recent weeks. Paired with soaring home prices, this has lifted the average mortgage interest and principal payment from $1,000 in January 2021 to $1,280 in January 2022 and driven housing affordability to a pandemic low (Chart 3). Mortgage rates should continue to rise as the Fed begins to withdraw monetary accommodation and unwind its balance sheet, and while we expect home price appreciation to continue, the rate of appreciation is likely to moderate.

*The number of existing homes available for sale is near record lows and fell to 850k in January, well below the 2019 average of 1.4m (Chart 3). This measure of housing supply has been trending down in the decade following the debt financed housing bubble, reflecting underinvestment in construction and the housing stock. While there is a considerable amount of housing currently under construction, supply and labor shortages are likely to delay completions. A potential moderation in the rate of home purchases in 2022 could weigh on household consumption of durable goods, but may lift household expenditures on remodeling and home renovations.

*Home prices rose broadly across the nation, and generally at an accelerating rate in January. In particular, home prices spiked in San Francisco (3.2% m/m), Tampa (2.6% m/m), and Phoenix (2.2% m/m), reflecting shifting patterns of mobility and migration patterns. Demand for rental units has also surged over the pandemic, and the rental vacancy rate has fallen to an almost four decade low to 5.6% (Chart 4). This has manifested as a steep increase in market rents with the Zillow Observed Rent Index increasing 17% yr/yr in February (Chart 5).

*Rising market rents will drive up official measures of shelter inflation, albeit with a fourteen to sixteen-month lag. Shelter inflation accounts for almost one-third of the CPI basket, and has already accelerated, with shelter inflation in the CPI increasing at a 6.4% annualized rate in February. We expect elevated home and rental prices to exert significant upward pressure on measures of headline and core inflation in 2022-23 (“OER, services prices, and inflation”, January 18, 2022).

Chart 1. Case-Shiller Home Price Index (yr/yr, %)

Chart 2. 30-Year Fixed Mortgage Rate

Chart 3. Housing Affordability

Chart 4. Rental Vacancy Rate

Chart 5. Zillow Observed Rent Index (yr/yr, %)

Mickey Levy, [email protected]

Mahmoud Abu Ghzalah, [email protected]

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