Home prices grew at a solid rate in December despite persistent high interest rates.
The S&P CoreLogic Case-Shiller index, which measures home prices, reported a 5.5% year-over-year increase for the month of December. That’s up from a 5.0% increase in November. Price growth has come down slightly after nine months of consecutive gains, but the cost of homes remain far higher than they were before the pandemic.
On a month-over-month basis, raw prices decreased by 0.4%, but when taking seasonal adjustment into account, prices actually rose 0.2%. The holiday season is slow for home sales which is why such a large adjustment was made.
Frozen supply is a major driving factor behind rising home prices. About two-thirds of home-buyers who purchased during the pandemic have locked-in mortgage rates below 4%, which is significantly below the current rate of around 6.5 – 7%.
“No one is going to sell out of a really low mortgage rate to take on a new mortgage at a higher rate,” said Troy Ludtka, economist for SMBC Nikko Securities America Inc.
The housing market is being carried by new home construction and sales, which have i
ncreased tremendously in the face of dismal existing home supply, Ludtka added. Latent demand is being funneled into the new home market, and construction is near record highs. This, however, still cannot make up for the gap in existing home supply.
Mortgage rates have been inching back up since their decline in November and December as Fed interest rate cuts no longer seem imminent. Rates remaining high will keep supply crunched, and it could also lead to slower price growth.
But the housing market is likely to remain solid, said Peter Morici, an economist at the University of Maryland.
“Interest rates are going to remain where they are now for a while because inflation is not coming down to 2% very easily, but beyond the Spring and Summer, I expect the housing market to be pretty decent,” he said.
Morici’s view is an optimistic take on how interest rate cuts will affect the housing market.
There is little consensus on what effect the Fed’s planned cuts to interest rates will have on the market and home prices. Some economists believe that lower mortgages will drive prices up to compensate. Others believe that lower mortgage rates will lead to lower home prices, because it will cause an increase in supply as people feel comfortable selling their homes and giving up locked-in mortgage rates.
