May home price gains split by region; LOs should look east

Home prices grew modestly in May, while inflation continued to surge, according to two home price indicators. 

The FHFA reported a 0.3% monthly increase from April to May and a 2.2% annual rise. Similarly, the S&P Cotality Case-Shiller home price index posted a 1.1% annual gain and a 0.9% monthly increase from April. 

"The May data reveals a market with potential for a seasonal rebound," said Thom Malone, principal economist at Cotality. "Low inventory levels are creating a floor for prices on the supply side."

While home prices are still growing compared to the previous year, the annual pace suggests a more normalized rate of appreciation compared to the rapid spikes seen before, something that loan officers should keep in mind when chasing volume. 

The West Coast is cooling while Eastern and Southern regions continue to drive national price gains. Out of nine divisions on the FHFA HPI, eight experienced slower year-over-year growth. 

For the third consecutive month, Chicago led all metros with a 6.9% annual increase in May on the Case Shiller HPI, the midwestern city shining in other HPI measures as well. Markets in the West and Sunbelt regions are under significant pressure. Las Vegas, -1.9%, was the weakest market, with noticeable losses also hitting Seattle, 1.8%, Denver, -1.8%, and Tampa, -1.6%. 

"This divergence may reflect shifting post-pandemic housing dynamics, including a growing return-to-office mandate that appears to be supporting traditional urban markets," said Rebecca Kaufman, associate director of commodities at S&P Dow Jones Indices. 

Real home prices see annual decline

While nominal prices are up slightly, home values have fallen in real terms for the 12th consecutive month. Inflation peaked at 4.2% in May, running roughly 3 percentage points higher than the 1.1% nominal home price gain. 

"Today's Case-Shiller reading showed 1.1% year-over-year, but that number is backward-looking by design; it reflects prices from a couple of months ago, not what's happening in the market right now," said Mike Miedler, president and chief executive officer of Century 21 Real Estate in response to the Case-Shiller number. 

Pending sales have been running consistently ahead of last year for weeks, according to Miedler's data, even as the average 30-year mortgage rate sits close to its high for the year at around 6.75%. Inventory also slowed after four straight years of increases as builder sentiment ebbs.

"A buyer sitting on the sidelines for a better rate is betting against a market where the homes aren't piling up to greet them when rates finally move," said Miedler. 

However, removing seasonal factors reveals a constrained market battling major affordability issues. With 30-year mortgage rates climbing back to 6.5% in May and inflation remaining high, buyers are dealing with steep living and borrowing costs that are ultimately depressing housing demand. 

"Against this backdrop, housing demand remains constrained, elevated borrowing costs continue to discourage potential homebuyers, and housing values decline in real terms for existing homeowners," said Kaufman.

The 30-year rate has continued to rise since, now around 6.58%, according to Freddie Mac.