Sunday, 18 of February of 2018

Economics. Explained.  

Case Shiller Index of Home Prices

January 30, 2018

Case Shiller Index of Home Prices rose 0.8% in both October and November.   Over the course of the past year home rices have risen 6.1%.  After having sustained year-over-year increases of about 5.0%, home prices have begun to rise a bit more quickly.  A 6.1% annual increase is the largest since July 2014.

There is a shortage of homes available for sale.  The inventory of existing homes is at 3.2 months which is well below the 6.0 month supply that is generally regarded as the point where supply and demand are roughly in balance.  This shortage of homes available for sale portends a trend towards higher prices in the months ahead.

While  builders have stepped up the pace of production there is still a significant shortage of available homes for sale.  Thus, builders have an incentive to boost production.  However, some of them are still having difficulty finding adequate financing and an adequate supply of skilled labor.  All of this suggests that  housing starts will continue to climb in the months ahead, but at a relatively slow pace.  We expect starts to gradually climb to 1,350 thousand units by the end of this year (from 1,200 thousand currently).

At the same time a continuation of job gains will boost income and make homes more affordable which means that moderately rising prices are not going to significantly hamper the housing industry.

Mortgage rates are now at 4.0% which is still very low.  They should rise only slightly from about 4.0% currently to 4.5% by the end of 2018.  If the Fed raises short-term interest rates 3 times in 2018 it would lift the funds rate to the 2.0% mark which is still quite low.

Housing today continues to be affordable.  The chart below from the National Association of Realtors indicates that  the housing affordability index now stands at about 160.0.  That means that consumers still have 60.0% more income than is necessary to buy a median priced home.   To put the current level in context,  just prior to the recession in 2007 consumers had 14% more income than was necessary to purchase a median priced home.   Housing at that time was very expensive.  Housing today remains affordable even though mortgage rates have risen to the 4.0% mark because consumer income is also rising.

Stephen Slifer


Charleston, SC

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