Home Prices Soar to New Record Highs

Dear Rich Lifer,

Home prices are continuing to climb to record levels due to the insanely low mortgage interest rates that keep juicing demand.

In fact, the closely watched Case-Shiller National Home Price Index on Thursday marked the highest annual rate of price growth since the index began in 1987!

This latest report showed that prices rose 16.6% in the year that ended in May 2021 — an increase from April’s year-to-date reading of 14.8%.

Today we explore why home prices are continuing to rise and weigh whether the Federal Reserve is to blame for the red-hot housing market.

Why the Market Is on Fire

Over the past year, we’ve seen competition for buying homes reach unprecedented levels. When the Covid-19 pandemic hit, families scrambled to find houses with more space and were more willing to move out of cities to find them.

Meanwhile, interest rates have been at record lows (more on that later), which has made applying for mortgages much easier than in pre-pandemic times.

Due to these factors, home sellers are receiving higher offers and more of them, driving competition and prices. 

Earlier this month, the National Association of Realtors reported that June’s median existing-home sales prices increased 23.4% from a year earlier to $363,300, a new high. 

Other, smaller indexes within the Case-Shiller National Home Price Index also showed increases — the Case-Shiller 10-city index gained 16.4% year-to-date in May, and the 20-city index rose 17%. 

Another measure of home-price growth by the Federal Housing Finance Agency was also released Tuesday and found an 18% increase in home prices from May 2020 — a record in data going back to 1991.

Analysts and economists say that these rapidly increasing prices are making home-buying unattainable for many, and demand continues to beat out supply. 

Robert Frick, a corporate economist at Navy Federal Credit Union, explained, “Demand is trumping everything. Higher inventory isn’t going to take the brakes off price increases.”

Builders are trying to bridge the gap but are contending with labor shortages and fluctuating material costs. Some are also putting a limit on new-home sales in an effort to make sure they don’t sell more than they can realistically build.

For example,  D.R. Horton, the nation’s biggest builder by volume, has seen orders going down. Its CFO Bill Wheat recently explained, “Based on the stage of completion of our current homes and inventory, production schedules and capacity, we expect to continue restricting the pace of our sales orders.”

According to the Commerce Department, this disconnect has resulted in three straight months of decreases in new-home sales — in June, this number fell 6.6% from May. 

Now that we have a better sense of where the market stands, let’s take a look at the role the Federal Reserve is playing in the current climate…

The Fed Stokes the Flames 

Randall W. Forsyth, Barron’s Up and Down Wall Street columnist, describes the role of the Fed in the housing market as “driving with one foot on the brake and the other pressing the gas pedal to the floor.”

By this, he means The Fed has been trying to play two competing roles, unsuccessfully. 

The Fed has been revving the engine by cutting short-term interest rates to near-zero and buying $120 billion of securities per month since last spring.

The National Bureau of Economic Research recently announced that the pandemic-induced recession, which began in February 2020, lasted only two months. Although 15 months have passed, the Fed hasn’t eased off the gas pedal.

The Fed is currently meeting, and economists are anxiously awaiting updates — specifically any changes that may be made regarding the Fed’s purchasing of $40 billion of agency mortgage-backed securities (MBS) per month.

Fed Chairman Jerome Powell defended the purchases during testimony on July 15, stating that the MBS buying isn’t drastically different from the Fed’s monthly purchases of $80 billion of Treasury securities because the bond market views both sectors as comparable. 

However, not everyone agrees, including Barry Habib, the founder and head of MBS Highway, an advisory firm. He contests that the Fed buying actually comes out to a much higher tab… a $100 billion tab.

Mr. Habib explains that if you take into account reinvestment of interest and principal payments that homeowners make on their mortgages, plus cash flows from refinancings, $40 billion is actually the minimum the Fed purchases per month.

Grumbling Grows Louder

Senator Pat Toomey, the top Republican on the Banking Committee, recently stated, “There’s no justification for the Fed to maintain [its purchases] at current levels, and doing so seriously risks contributing to heightened inflation.”

Some Fed officials fear that scaling back bond purchases too quickly could weaken the economy once the trillions of dollars in pandemic aid are depleted. These worries are especially heightened due to the fast-spreading Delta variant, which is threatening more lockdowns and reintroduction of restrictions. 

One such official St. Louis Fed President James Bullard recently commented, “I’m leaning a little bit toward the idea that maybe we don’t need to be in mortgage-backed securities with a booming housing market and even a threatening housing bubble here, according to some people.”

Roberto Perli, a founding partner of research firm Cornerstone Macro and a former Fed economist, also argues that the Fed’s quantitative easing (QE) policies are too front-loaded, meaning the markets adjust rates because of Fed announcements. When the Fed actually follows through on its plans, the purchases have already been factored in by investors. 

Perli explains, “nobody ever thought that QE was going to end after a month or two months or six months, so the market built expectations of how much QE there would be…In fact, those expectations were all that mattered.” 

Of course, no one wants a repeat of the 2008 financial crisis, but is keeping these policies in place for this long really helping the housing market?

For now, we’ll have to wait and see what the Fed decides…

To a Richer Life,

The Rich Life Roadmap Team

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