Commentary Directory

Record Home Price Levels Point to Strength in Post-Pandemic Economy

Jacob Hess
January 27, 2021

The COVID-19 pandemic devestated many parts of the economy with business shutdowns and drops inconsumer confidence. Consumption and business investment tanked at the end of Q1 and has only just gotten back near pre-pandemic levels. The unemployment rate remains elevated with many members of the lower class left reliant on relief from the government in unemployment benefits and direct payment. In the face of all that, the housing market has gotten hotter than ever. Almost every major real estate indicator have already recovered from a brief interruption and are topping pre-pandemic levels.

Two measures of home prices came out on Tuesday pointing towards strong demand for housing. The Case-Shiller Home Price Index rose to a 9.5% annual change in November, up from 8.4% in October. The index hasn't been that hot since July 2018 just before a peak of 10.9% in October 2013. The overall index is at all-time highs, at 219.6, surpassing the pre-financial crisis peak of 182.0 in 2007 Q1. The Managing Director and Global Head of Index Investment Strategy and S&P Dow Jones Indices said that November's report "ranks near the top decile of all monthly reports." However, different from trends of rising home prices in the past, this trend was defined by movement away from "urban apartments" to "suburban homes" that likely represents a "true secular shift."

The FHFA House Price Index mirrored the growth seen in the S&P Case-Shiller index with a 1.0% monthly jump in November fueling a 11.0% YoY increase in the index. And again, like its S&P cousin, the FHFA House Price Index in November has reached its highest point at 202.4, above the pre-financial crisis peak of 165.4 (again) in 2007 Q1. The monthly gain of 1.0% of marked the 6th straight month of growth of one percent or more. The FHFA’s Deputy Director of the Division of Research and Statistics points to "low rates and tight housing supply" as the main reason for elevated prices that have crept up across every region. But it's not just any low rates and tight housing supply, it's the lowest rates and the tightest supply seen in the history of the FHFA House Price Index. The extremity of the conditions has almost doubled the compounded annual growth rate of the index, Since January 1991, compounded growth was 3.9%, well below the compounded growth since January 2012 of 6.4%.

With all the talk of asset bubbles, it's not difficult to bring home prices into the conversation of being a bit frothy, especially in the context of the COVID-19 pandemic when potential home buyers might be more conservative. However, it seems that the desire to leave urban areas and move to less crowded regions has been force stronger than sentiment. On top of that, housing supply suffered from a blip in construction that was hindered by the COVID-19 pandemic. New housing starts tanked -27.3% in 2020 Q2 while new one family home sales barely budged, up 0.3% in 2020 Q2. In the end, it doesn't seem so obvious that there is a bubble.

One thing is true, residential real estate has been a strong positive for the economy and has been representative of the strength of the middle class during the pandemic. As long as conditions invite growth in the demand for real estate, that is likely to happen, and individuals are unlikely to abandon their desire to drift away from urban environments. In 2021, growth in home prices and real estate activity should remain at a comfortable pace.