The Case-Shiller report on Tuesday is expected to show continued price growth in line with the past few months at around 6% year-over-year. But delayed Fed rate cuts and higher mortgages in February could have lowered supply and caused prices to outpace expectations. Here’s what to look out for in the upcoming report:
The Price of Homes
Home prices are expected to have steadily increased in February, but if they grew more than 7%, that would indicate a supply crunch even more pronounced than in previous months. Low supply and affordability for prospective buyers is the big challenge in the current market.
Homeowners looking to sell but waiting for lower mortgage rates will have to hold on for a while longer, but the value of their home will continue to rise in the meantime.
Supply
Home prices are near record highs, driven by an extremely low supply which cannot meet the demand. There are currently around 1.5 million homes for sale in the US, or about a 3 month supply. A healthy housing market has 6 months of inventory –– twice the current level.
The supply of homes on the market is so low because of mortgage rate reversals which occurred during the pandemic. In 2020 and 2021, mortgages were around 3%, but by October 2023, they shot up to 8%. The people who bought homes when rates were at 3% do not want to exchange their mortgage for one that is at least twice as expensive, and as a result there is a severe shortage of homes for sale.
Tuesday’s report is all but guaranteed to show home prices rising. The amount it rises is a matter of supply determined in part by mortgage rates. Lower mortgage rates would free up supply and bring prices down, but rates went up in February.
Mortgage Rates
If Tuesday’s report shows that higher mortgages locked up supply enough to accelerate price growth in February, that would be a bad sign for housing affordability in the near future.
In February, mortgage rates hovered just below 7%, but earlier this month in April, they increased past 7% for the first time since November 2023. Trends caused by February’s rate hikes would be aggravated by April’s greater increases.
The Rate of Price Increase
In February, mortgage rates climbed for the first time since October. These higher rates may have reversed small gains in supply which occurred when rates began dropping at the end of last year, causing an even more rapid increase in the price of homes.
Many economists, however, expect price growth to remain steady around 6%, as higher rates simply continue to keep supply where it is rather than reducing it even more. People are starting to get used to higher mortgages, so sub-1% fluctuations may not have a significant impact on the supply, and by extension price, of homes
Fed Rate Cut Delays
The economy has consistently outpaced expectations since the beginning of the year, and the Federal reserve has had to continually delay planned rate cuts. These delays caused modest mortgage rate increases in February.
The strength of the job market and stubborn inflation revealed by April’s economic indicators shifted the conversation from delayed cuts to the potential of fewer than 3 or even no cuts in 2024. This is what recently pushed mortgage rates over 7% for the first time in almost 5 months.
Tuesday’s report will give a preview of what April’s rate hikes might bring, because the trend of mortgage rates rising again began in February. Steady price growth in line with previous months should temper fears about the future, but higher than expected price growth would signify the start of a worsening affordability crisis over the next few months.
