What Historically High Home-Prices Mean For You
Authored by Reilly Radke
For those thinking of buying a new home anytime soon, you might want to reconsider. Reports from Wall Street Journal reporter, Nicole Friedman, reveal the S&P CoreLogic Case-Shiller National Home Price Index saw a 19.8% increase since the year that ended in August. The jump in growth is the highest annual rate of price growth since the index’s creation in 1987. Friedman claims prices have risen sharply due to sharp increases in demand, induced by households looking for more space to work from home and a new flexibility to move farther away from their offices.
The Case-Shiller index reports on a two-month delay, with most recent prices reflecting purchases made in July and August. According to the National Association of Realtors, the median existing-home sales price in September increased 13.3% from last year to $352,800. In addition, Freddie Mac reported that as of Thursday the average rate on a 30-year-fixed-rate mortgage rose to 3.09%.
Case-Shiller Index - Average Home Prices
Similarly, Friedman included a report released by the National Association of Realtors, showing that home sales rose 7% in September from the prior month to a seasonally adjusted annual rate of 6.29 million. The market is so hot that the average duration a house was on the market in September was 17 days, with many selling above their listing price.
Justin Lahart, another reporter from the Wall Street Journal, believes that until more homes become available, the housing market will remain strong even through a season that is usually slower for the market. Lahart states that real-estate agents, “might be busier still, if there were more houses to sell. At September’s selling pace, there were only 2.4 months of homes on the market. That compares with an average month’s supply of 3.9 in 2019.”
As a result of a lack in housing supply, building activity has increased. Although, home-building fell 1.6% in September from August as a result of material delays and labor shortages. Residential permits, a first step when setting up for future home construction, fell 7.7%.
Parker Young, president of Straub Construction, details frustrations the construction industry is facing currently. Young states that after storms in Texas earlier this year he had to find an alternate for insulation material as it became difficult to find petroleum-derived roof insulation boards. The switch cost him about $20,000 for two apartment building projects. If he had waited for the previous material to ship, it would have set the 14-month projects back six to nine months.
Tony Rader, vice president of National Roofing Partners located in Texas, is experiencing similar supply-chain issues. As a result of continuous blockage of ships at major U.S. ports, Rader explains, “We’re just concerned that this is not going to get any better right now.”
Additional consequences that lie behind the rise in home-price growth and supply/demand imbalance are reflected in the proportion of first-time buyers decreasing by 28%: its lowest level since July 2015. Other reports made by Orla McCaffrey from the Wall Street Journal outline calculations made by the Atlanta Fed that measure affordability using a three-month average of median home prices and median household incomes. The Atlanta Fed stated that in July, median home prices were up 23% from a year before and median incomes were up 3%.
Currently, the median American household would have to forego 32.1% of its income on mortgage payments on a median-income priced home. To add, higher prices are requiring larger loans, which forces buyers to accept years of larger monthly mortgage payments.
Nicole Freidman claims that even though mortgage applications rose 8% in September, the average rate for a 30-year fixed-rate mortgage has increased enough to turn buyers off. Friedman believes the increase in home sales can be explained by the fact that homes usually go under contract a month or two before the contract closes. Thus, September figures most likely reflect purchases made in August or July when mortgage rates were lower.
Several reports mentioned above have concluded that it could take years before supply and demand equalize, warning that we could see high home-prices for a while. Freidman also adds that the pace of growth is slowing, and price cuts are becoming increasingly common.