Home prices increased by a record 20.6% in the 12 months ending in March, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Indices, even amid other signs that the housing market is slowing in response to the Federal Reserve's efforts to raise interest rates.
The jump in house prices is the largest increase notched in the 34 years that the record has been kept. The cities that experienced the most price growth were Tampa, Phoenix, and Miami, which saw 34.8%, 32.4%, and 32% growth, respectively. The price growth coupled with rising mortgage rates has made it less affordable to buy homes.
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Mortgage rates have risen quickly as the Federal Reserve hikes interest rates to combat inflation, with the average rate on a 30-year loan now at 5.1%. Mortgage rates were at just 3.1% at the start of the year, according to Freddie Mac.
“Those of us who have been anticipating a deceleration in the growth rate of U.S. home prices will have to wait at least a month longer,” said Craig Lazzara, managing director at S&P Dow Jones Indices. “The strength of the composite indices suggests very broad strength in the housing market, which we continue to observe.”
The data for the index update released on Tuesday are from March. Other more recent data indicate that the smoldering housing market is cooling off in response to the higher mortgage rates.
Real estate brokerage Redfin announced on Friday that nearly 1 in 5 home sellers, more than 19%, dropped prices for the month ending on May 22. That marks the highest rate since October 2019, the study found.
Additionally, new home sales in April plunged from just a month ago, dropping by 16.6% to a seasonally adjusted annual rate of 591,000, the Census Bureau announced last week.
Existing-home sales also declined by 2.4% in April to a seasonally adjusted annual rate of 5.61 million, according to a recent report by the National Association of Realtors.
“As the Federal Reserve focuses on slowing demand and reducing inflation, long-term interest rates will likely continue their upward trajectory, which will contribute to slower house price growth over the next two years,” PNC senior economist Abbey Omodunbi said on Tuesday.
The Fed is facing the tough task of raising interest rates to bring down inflation while trying not to dampen the economy so much that it falls into a recession. Fed Chairman Jerome Powell is set to meet with President Joe Biden at the White House on Tuesday to discuss efforts to ease the price pressures.
The meeting will mark the first huddle between Biden and Powell, a Republican, since the latter was renominated to serve another term as Fed chief. Prior to the meeting, Biden put out an op-ed in the Wall Street Journal in which he affirmed the importance of an independent central bank.
“My predecessor demeaned the Fed, and past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won’t do this,” Biden wrote. “I have appointed highly qualified people from both parties to lead that institution.”
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Inflation has quickly become the biggest political hot potato for Biden and Democrats heading into the midterm elections.
While there are some indications that the tsunami of higher prices has crested, it is still expected to take months or years for inflation to fall back down to the 2% annual level that the Fed is pushing for, meaning that it will almost certainly be the defining topic of this election cycle.