These numbers are insane. The Case-Shiller index just posted an 18.6% year-on-year gain for June. Home prices are now 41% higher than their last peak in 2006, during the housing bubble.
And it's not because Case-Shiller is a "big-city" index. For starters, the broader 20-city composite was up 19% in June, outperforming the core 10-city index. What's more, the separate FHFA home price survey, which covers much more of the country, has been showing similar gains–it was up 18% year-on-year in May.
Recall, unlike the stock market, home prices never plunged during the pandemic. These are simply gains…building on gains. Some cities are seeing truly eye-popping increases. Prices in Phoenix were up 29% in June from the previous year, per Case-Shiller. Prices in San Diego, up 27%. In Seattle, up 25%. One outlier? Chicago, the only major city where prices aren't at all-time highs.
The obvious thing to say here is this is wildly out of whack, it can't be sustained, it's all going to collapse, etc., but…that's not quite the message we're getting. We already know the pandemic unleashed a "Great Rotation" of the U.S. population, with people pouring out of urban areas into homes, or relocating from one (often higher-cost) place to another (and driving up prices for locals). Which is to say–these gains are driven by "real" demand, not psychological anticipation of profits, as happened in '05-'06.
We've also been checking in frequently with Evercore analyst Stephen Kim, who's been out of consensus with the rest of Wall Street in that he foresees much higher prices continuing into next year than his colleagues do. A few months ago, on CNBC, he told us home prices could easily hit 20-25% annual appreciation. We're not far off from those levels today.
As unpleasant as it is for those trying to get into the market, Cole Smead at Smead Capital Management sees the continued rise in housing wealth as a positive for income inequality. While the past fifteen years has seen a rise in stock market wealth while household equity stagnated, the next decade or so could see the opposite effect, he argues.
"The average employee in the U.S. does not work for a company that is publicly traded," he wrote in a note this morning, "[But] housing is something that average people own." If the stock market corrects from its "extremes" and housing outperforms, like it did in the inflationary '70s, he says, "home equity as a percentage of total net worth will go to higher highs than we have ever seen in the data!"
All of which is to say, Smead Capital is still long the homebuilders, despite being cautious about the overall S&P 500. The XHB homebuilder ETF is up 35% since January, outperforming the broad market by about 15 points. But as our Diana Olick points out, home sales have already started slowing, and prices typically follow with about a six-month lag. And home-buying intentions in the consumer confidence report this morning further "cooled somewhat."
I'm not sure I can get on board yet with the idea that prices can just keep rising and rising. But one thing is for sure–those who bought in the red-hot, panicky housing market last year actually did seem to buy in at a good time.
See you at 1 p.m!