Home prices this year began rising at the fastest annual pace in 12 months. The quickening price growth at the start of the year reflected low mortgage rates, rising family income and a lean inventory of homes for sale – economic conditions that characterized the home sales market prior to the national emergency surrounding the coronavirus (COVID-19). During the next two months, home price gains will likely continue to outpace inflation for Case-Shiller Index values seen through March. This is likely because most sales that settle during March are based on sales contracts signed in January and February, prior to the pandemic’s effect on the U.S. economy.
For the 20 urban markets covered by the S&P CoreLogic Case-Shiller Indexes, Phoenix topped the leader board in price growth for the eighth consecutive month, rising 6.9% from January 2019 to January 2020. The metros that followed were Seattle; Tampa, Florida and San Diego, each experiencing price growth of 5.1%. All of these markets have had strong population growth and local economies fueling home purchases. New York (0.8%) and Chicago (0.6%) reported the smallest 12-month gain of the 20 metros. The Census Bureau reported that Illinois and New York had an annual decline in population between 2018 and 2019.
To contrast home-value appreciation with a broad inflation metric, we can compare the U.S. Case-Shiller index with the Bureau of Economic Analysis’ Personal Consumption Expenditures (PCE) index: The PCE was up 1.8% in January 2020 compared with one year earlier. Thus, U.S. price growth was running at better than double the pace of inflation through January. Further, home-price gains exceeded inflation in 18 of the 20 urban markets – all but New York and Chicago.
By price tier, homes that sold in the lower one-third of the price distribution increased in value more than expensive homes. Because new home construction generally adds more for-sale inventory at the upper-end of the price distribution, new home sales have helped to moderate price growth for higher-priced homes. In addition, investors typically are more active purchasing homes in the lower one-third of the price distribution. As an example, in Phoenix, home prices were up 9.6% for homes that sold in the lowest one-third of the sales distribution and were up 6.2% for those that were in the highest one-third.
COVID-19 continues to place a cloud over the housing market as it enters the spring buying season. Home sales will likely be much lower than had been previously expected, as prospective buyers and potential sellers shelter-in-place in many urban centers. Substantive effects on the Case-Shiller Index are unlikely to be seen through the March index (to be released May 26, 2020).
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