Magnificent News: Home prices are...just getting started?

TUE, AUG 31, 2021

YOUR AFTERNOON NEWS UPDATE AND MARKET ACTION FROM CNBC

AS OF TUE, AUG 31, 2021 • 12:32 ET

DJIA		35431.12
		+0.09%	+31.28

S&P 500		4530.08
		+0.03%	+1.29

NASDAQ		15265.48
		0.00%	-0.41

EDITOR'S NOTE

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!

Kelly

Kelly Evans
Twitter: @KellyCNBC

Instagram: @realkellyevans

KEY STORIES

Stocks making the biggest moves in the premarket: Zoom Video, Robinhood, Designer Brands and more

The stocks making the biggest moves in premarket trading include Zoom Video, Robinhood, Designer Brands, and more.

South Korea passes bill limiting Apple and Google control over app store payments

Google and Apple's policies usually require developers to pay them a commission as high as 30% in every transaction.

Soaring home prices shattered another record in June, S&P Case-Shiller says

Home prices in the U.S. are now 41% higher than their last peak during the housing boom in 2006.

Nearly 1 million Covid booster shots have already been administered in the U.S., CDC data shows

It's unclear if all the extra doses the CDC reported were administered in immunocompromised people.

'They have better things to do' – Major Republican donors are staying away from Trump

Several of the GOP's most influential donors are signaling that they don't plan on helping fund former President Trump's political operation, at least for now.

Microsoft's first major operating system in 6 years, Windows 11, launches Oct. 5

Microsoft will bring out Windows 11 six years after Windows 10, the longest stretch between operating system releases in the software company's history.