Outlook Home Prices Plateauing, Rents Catching Up

The housing sector surged during COVID in large part due to loose money. The Federal Reserve kept short-term rates artificially low and the M2 measure of the money supply soared. Now, with rising short-term rates and slower growth in M2 sending mortgage rates higher, the housing sector has a bad case of indigestion. Sales are down, construction is down, and the most recent reports on home prices show a sudden and sharp deceleration.

This should sound familiar, because it’s very similar to what happened to “real” (inflation-adjusted) retail sales. Sales soared in 2021 but have since plateaued, as growth in consumer spending has come from services, not goods. Expect something similar in the next few years with housing, with national average home prices roughly unchanged while rents continue to catch up.

Recent problems in the housing sector are widespread. Existing home sales have dropped for six straight months and, with the exception of the first few months of COVID, are the slowest since 2015. New home sales are the slowest since early 2016, even if you include those horrible first few months of COVID.

Private residential construction rose for twenty-four straight months through May and has now declined for two straight months. Meanwhile, after peaking at a 1.805 million annual rate in April, housing starts fell almost 20% to a 1.446 million rate in July. In time, fewer housing starts today will lead to less overall construction and home completions later this year.

But perhaps the most dramatic change is on prices. The national Case-Shiller index rose more than 1.0% in every month from August 2020 through May 2022. Every single month. Home prices rose a total of 8.9% in the first five months of 2022. More of the same. But then came June, when prices rose a meager 0.3%.

As a result, some are thinking we are in for a massive housing bust the kind of which hit the US after the last boom in the 2000s. But we think that’s highly unlikely. Housing is going to feel some pain, but we are facing nothing like what happened in the last housing bust.