Home Prices Soar to Record High, Squeezing Affordability

U.S. home prices continued to rise relentlessly in March, as rising interest rates to fight inflation keep home inventory low, making it harder for buyers to purchase their own homes.

The S&P CoreLogic Case-Shiller 20-city index rose 7.4% year-over-year in March, accelerating from a 7.3% increase in February. The data released on Tuesday.

Compared to February, the seasonally unadjusted 20-city index increased prices by 1.6% in March. Seasonally adjusted, the 20-city index increased by 0.3%. All major metropolitan markets saw month-over-month price increases.

The Case-Shiller 10-city index rose 8.2% year-over-year in March, up from 8.1% in February. Month-over-month, the unadjusted index rose 1.6% and the adjusted index rose 0.5%.

The National Home Price Index rose 6.5% year-over-year in March, unchanged from the previous month. It rose 1.3% unadjusted and 0.3% seasonally adjusted. The national index hit a new record high, the sixth time in the past 12 months.

The average price of an existing home in March was $392,900. The average price of a new home was $439,500.

San Diego saw the sharpest increase in home prices, up 11.1 percent annually, followed by New York, Cleveland and Los Angeles. While urban markets remain hot, soaring prices are increasingly crowding out potential buyers.

Brian D. Luke of S&P Dow Jones Indices noted that while Sunbelt markets have boomed during the pandemic, northern metropolitan areas have seen rapid growth in recent years, led by the Northeast, but that growth poses challenges for home affordability in these regions.

The index tracks repeat sales data and is released with a two-month lag, reflecting a three-month moving average. The March data is based on purchasing decisions made early last year, suggesting that for many people, the dream of homeownership is becoming more distant.

Mortgage rates are soaring as the Federal Reserve tries to tackle inflation, which spiked immediately after President Biden took office, with the annual rate of increase in the Consumer Price Index rising from 1.4% in January 2021 to 9% in June 2022. The latest report showed that the Consumer Price Index rose 3.4% year-over-year in April.

Between the spring of 2022 and the summer of 2023, the Fed raised its benchmark interest rate from near zero to the current range of 5.25% to 5.50%. This has led to higher mortgage rates, with the average rate on a 30-year fixed mortgage rising from 2.65% in January 2021 to about 6.75% in March of this year.

High interest rates typically weigh on home prices, but the sudden rise in interest rates after a long period of low rates, triggered by a surge in inflation under President Biden, has created a new trend in the housing market: rising interest rates and prices.

Many homeowners with mortgages would have to accept much higher interest rates if they were to sell their current home and buy a new one. As a result, many homeowners are staying put and there are fewer homes for sale. The lack of supply has caused prices to rise significantly, even as mortgage rates remain high.

The Fed had been widely expected to cut interest rates multiple times this year, but persistent inflation has forced central bank officials to delay cuts and say they will not start lowering the benchmark federal funds rate until they have several months of data that gives them confidence that inflation is on track to return to its 2 percent target in a sustained manner.