Home Prices Appreciating Due to High Demand, Low Inventory

John Smith
January 1, 2023
5 min read

Strong home price gains were reported for August, thanks to high demand and low inventory. Low inventory also impacted sales of new homes in September, while both Initial and Continuing Jobless Claims declined in the latest week – but there's a caveat.

The Caveat to the Decline in Jobless Claims

Jobless Claims the Week of October, 24, 2020

Another 751,000 people filed for unemployment benefits for the first time during the week ending October 24, which is 40,000 fewer people than during the previous week. California (+159K), New York (+55K) and Massachusetts (+54K) reported the largest increases.

Continuing Claims, which measures people who continue to receive benefits, also improved by 700,000 to 7.6 million.

While the decline in Continuing Claims is a step in the right direction, it is important to remember that people can apply for Pandemic Emergency Unemployment Compensation (PEUC) when they run out of regular benefits. PEUC extends people's benefits for another 13 weeks.

In the latest week, the number of PEUC filers increased by almost 400,000 people, so unfortunately the drop in Continuing Claims is not quite as positive as the headline implies. In addition, it's unclear from the decline in Continuing Claims if people are in fact going back to work or if they're running out of benefits.

Low Inventory Impacts New and Pending Home Sales

New Home Sales September 2020

New Home Sales, which measures signed contracts on new homes, came in at 959,000 in September, which was down 3.5% from August and slightly lower than the small increase expected. However, sales are now up 32.1% compared to September of last year.

The median new home price increased year over year to $326,800. This means that half of the homes sold were above and half below that price and, as a result, more higher-priced homes sold in September.

Inventory remains very tight, as there were only 284,000 homes for sale at the end of September, which equals a 3.6-months' supply. Typically, 6 months is considered normal.

Pending Home Sales September 2020

Pending Home Sales, which measures signed contracts on existing homes, were down 2.2% from August to September. This was less than the 3% gain that was expected. However, sales are still up 20.5% when compared to September of last year, which is especially impressive considering that the supply of existing homes is down almost 20% in that same period.

The monthly decline was not due to a lack of demand but a lack of supply. Quite simply, if there were more homes on the market, there would be more sales.

Home Prices Continued to Appreciate in August

Case Shiller Home Price Index August 2020

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, reported a 5.7% annual gain in home prices in August nationwide. This was significantly higher than the 4.8% annual appreciation reading that was reported for July.

The 20-city Index showed a 5.2% annual gain, also up from July's reading of 4.1%. Nearly all of the cities saw strong gains, with Phoenix (+9.9%), Seattle (+8.5%) and San Diego (+7.6%) leading the charge.

Putting these figures in context, someone buying a $300,000 home that gains 5% in appreciation would benefit by just over $17,000 in just one year on appreciation alone. Plus, the equity gain with amortization would be even greater.

FHFA House Price Index August 2020

The Federal Housing Finance Agency (FHFA) also released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Home prices rose 1.5% from July to August and are up 8.0% when compared to August of last year, which is even stronger than the 6.5% annual appreciation reported in July.

Looking Past the Inflation Headlines

The Fed’s favored measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation increased 0.2% from August to September and remained stable at 1.4% year over year.

Core PCE, which strips out volatile food and energy prices and is the Fed's real focus, also increased 0.2% in September. Year over year, Core PCE rose from 1.4% to 1.5%, however the previous reading was actually revised lower from 1.6% to 1.4%.

While inflation looks tame, it is important to take a deeper look at the numbers. The previous 5 month-over-month readings show that core inflation is up 1.4%. The current year-over-year reading of 1.5% is being weighed down by some negative and very low readings previously. When those numbers are replaced, we could see inflation start to tick higher quickly.

Why is this important?

Rising inflation can cause home loan rates to move higher. Home loan rates are tied to a type of Bond called Mortgage Backed Securities and as inflation erodes a Bond's fixed return, the only way to compensate investors is with a higher rate. So, the possibility of rising inflation is always something we need to monitor.

It's also worth mentioning that PCE is a poor measure of inflation because it has a low weighting towards housing and out of pocket medical expenses, both of which are very important to consumers. Real inflation is likely higher than what is reflected in this latest report.

In Other Economic News

Personal Income, Personal Spending and Durable Goods Orders (which reflects new orders placed with domestic manufacturers for delivery of factory hard goods) all came in better than expected in September, while the first look at third quarter GDP came in up 33.1%. This was slightly higher than expectations of 32% and a nice improvement from the final second quarter figure of -31.4%.

One important thing to note, however, is that the 33.1% gain in the third quarter does not erase the -31.4% drop in the second quarter. GDP would have to increase almost 46% to make back what was lost. In addition, the report showed that the biggest contributor to GDP was consumer spending, which has been aided by stimulus. If we don't see another stimulus package, the economy in the fourth quarter could suffer.

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