My thought has been for months that housing would be fine. In fact, I expected that price rises would accelerate given the lack of inventory for sale and low rates. Whelp, here we go. Here’s the FHFA price index updated through July.
Prices are up 6.2% year over year and accelerating. Inventory is low everywhere still and I expect this to continue.
One of the first things to understand when looking at an asset is what drives long-term returns. While people say for RE it’s location, location, location, at a macro level it’s location, inflation, and mortgage rates.
This graph shows you the famous Case-Shiller index (blue line). It’s an index of nominal prices for housing. It’s up 241% over the last 3 decades.
I then make two adjustments. The first is I adjust for the fact that mortgage rates have gone from 10% to 3% over this period. I calculate how much house prices would be rates stayed the same.That is the grey line. You can see after that adjustment, house prices are only up 81%.
I then adjust for inflation by using the CPI index as well as rates (red line).
As you can see, the entire increase in house prices the last 30+ years can be explained by inflation and mortgage rates. About 2/3 of the price change is due to mortgage rates going down and 1/3 inflation.
Thus, future prices will depend on those two things as well. I’m not sure rates can go much lower, which will be a drag on price increases in the future.