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You've seen the headlines. Recent data points from sources such as the S&P Case-Shiller Home Price Index or the FHFA All-Transaction House Price Index confirm a convenient truth that home prices have returned to growth. While homeowners, the press, and markets celebrate the positive shift in directionality, the emergent optimism neglects a critical piece of the puzzle: inflation. While nominal prices experienced a benign erosion, real values (inflation-adjusted) have seen a more significant correction.
According to the S&P Case-Shiller HPI, home prices peaked in June 2022. Thereafter, prices declined in the following seven (7) months, totaling an aggregate devaluation of about 3.0%. By the same measure, after prices bottomed out in January 2023, they have now inflected and posted gains in both February and March of this year. Through March, nominal prices are down by just 2.3% from their 2022 peak.
Now, layering in the impact of inflation reveals a more sobering picture of the housing market. Inflation-adjusted home prices peaked in May 2022 (instead of June) and reached their most recent bottom in February 2023. In that time, real home prices dropped by 5.8% — nearly doubling the aggregate devaluation captured by nominal prices. However, as a bright spot, real home prices rose slightly (+0.36%) as month-over-month CPI inflation abated.
Year-over-year, nominal home prices still hold up in positive territory — albeit barely. After annual home price appreciation topped out at 20.8% in March 2022, the growth rate has fallen in twelve (12) consecutive months, reaching a recent low of 0.6% in March 2023. Meanwhile, inflation-adjusted home prices are down 4.1% year-over-year. Over the coming months, these year-over-year inflation-adjusted declines may reach lower as inflation remains poised to outpace nominal home price growth.
As the timeless Irving Fisher said, "The illusion that nominal value is the same as real value is one of the most persistent of all illusions." As the US economy is (hopefully) concluding the worst inflationary surge since the 1980s, a recent wave of housing market optimism has Mr. Fisher's words ringing true.