Home Prices In "Correction" Territory?

Earlier today, two notable housing data points crossed the tape, namely the Case-Shiller Home Price Index "HPI" and the report on New Single-Family Home Sales "NHS". 

The national HPI reading showed home price growth decelerating yet again to a rate of 3.54% year over year. 

National Home Price Index Year over Year Growth:Source: S&P, Dow Jones, EPB Macro Research

A chart that I frequently post when looking at the home price index data series is the year over year change in the year over year growth rate. What we are looking for in this chart is to see if the rate of growth is accelerating or decelerating.

The chart below takes the current year over year growth rate minus the year over year growth rate from one year ago.

That means if home prices were growing at 5.0% year over year in 2017 and 6.0% in 2018, the year over year change in the year over year growth rate would be +1%.

On a national level, the growth in home prices was increasing by roughly 0.9% per year at the end of 2017. Price growth is now negative compared to the growth rate one year ago and the pace of decline is worsening.

As the rate of change in home price growth started to fall at the end of 2017 and early 2018, it was clear it was time to get bearish on housing. I continue to expect the rate of change in home price growth to accelerate to the downside for the coming months.

I cannot start to get bullish on residential housing until the rate of change in home price growth starts to inflect higher (or gets less negative).

Of note, however, is that a shorter term rate of change, the blended RoC calculation which is my own measure, has started to flatten out which is a positive sign on the margin. 

Year over Year Change in Year over Year Growth of Home Prices:Source: S&P, Dow Jones, EPB Macro Research

After each Case-Shiller report, I update the values in the table below which shows the year over year growth rate in home prices by city and compares it to the growth rate one month ago, six months ago and one year ago.

The table indicates that only 48% of the cities are showing growth that is higher than last month and 0% of cities are showing growth that is higher than six months ago and 0% compared to one year ago.

The table below is sorted by the 1-year rate of change. The cities at the top are not necessarily growing the fastest, but are accelerating at the fastest pace (or decelerating at the slowest pace). The order of this chart is very important as to the health of the respective market. In general, you want to be bullish of "accelerating" markets and be bearish of "decelerating" markets. Currently, all cities in the table below are decelerating relative to their price growth one year ago. 

Home Price Index Table By City (Sorted By Rate Of Acceleration):Source: S&P, Dow Jones, EPB Macro Research

The following table sorts the 20 cities by current increase in home prices. Las Vegas leads the country with home prices increasing 7.14% year over year but price growth is starting to cool.

Seattle in on the verge of becoming the first city to post a decline in home prices on a year over year basis. Cities in California are also edging towards negative territory.

Home Price Index Table By City (Sorted By Year over Year Price Growth):Source: S&P, Dow Jones, EPB Macro Research

The other housing data point of the day was the updated reading on NHS. Recently, the volume of transactions for NHS neared the cycle peak but has now dropped notably and sits 12% from the cycle peak recorded in November of 2017. 

New Single-Family Home Sales:Source: Census Bureau, EPB Macro Research

When studying cycles, various composite indicators, or single data points, three key areas to measure are the length of the decline, the magnitude of the decline and the breadth of the decline. 

In the case of NHS, the decline started in November 2017 with a magnitude of -12% as of this latest data point. 

In terms of breadth, we'd look to see how many regions are showing declines and all the subsets of this data point. 

In year over year terms, the growth rate in new home sales is trending sharply lower, falling 3.69% in this latest report. 

New Single-Family Home Sales Year over Year (%):Source: Census Bureau, EPB Macro Research

The median sales price of a new home fell to $308,000 which represents a decline of 10.3% from the peak median price of this economic cycle. 

For newly constructed homes, home prices are in "correction" territory. 

Median Sales Price Of New Single-Family Homes:Source: Census Bureau, EPB Macro Research

The year over year growth rate of the median sales price for newly constructed homes is also negative, falling 2.75% in this latest report. The trend in the year over year growth rate is also sharply negative. 

Median Sales Price Of New Single-Family Homes Year over Year (%):Source: Census Bureau, EPB Macro Research

Over the past year, the median existing-home price increased by about 3% while the median value of a new home declined roughly 3%. 

Despite the massive drop in mortgage rates, housing data can't seem to find its footing, decelerating in year over year terms. 

The HPI data was for the April reporting period while the NHS data was for the May reporting period. 

Mortgage rates dropped again in June so the next few months will be informative regarding the health of the consumer. 

If housing data continues to decline with mortgage rate falling under 4% again, that is a major red flag. 

Has this data impacted housing stocks? Yes. Homebuilder companies, defined by ETF ITB are down 19% from their peak in January 2018 relative to defensive sectors such as XLU that sit near all-time highs.