July 7, 2020 | US House Prices to Drop 6.6% by May 2021, First Annual Decline since Jan. 2012: CoreLogic, Owner of the Case-Shiller Index

CoreLogic, which owns the Case-Shiller Home Price Index, released its monthly “Home Price Index Forecast” this morning, based on the Case-Shiller data. After years of being bullish about home prices, CoreLogic suddenly turned bearish.

It forecast that prices of single-family houses, including distressed sales, would begin dropping on a month-to-month basis with the June reading – it just released its May reading, which was up 4.8% year-over-year – and that prices, as tracked by the national Home Price Index (HPI), would be down 6.6% year-over-year by May 2021.

“2021 will mark the first year home prices are expected to decline in more than nine years,” CoreLogic said. The last year-over-year decline in the HPI was booked in January 2012.

“Strong home purchase demand in the first quarter of 2020, coupled with tightening supply, has helped prop up home prices through the coronavirus (COVID-19) crisis. However, the anticipated impacts of the recession are beginning to appear across the housing market,” the report said.

The recent surge in pending home sales and in purchase mortgage applications to levels above June last year, supported by record-low mortgage rates, “continues to exceed expectations despite the severe recession,” CoreLogic said in the report (download). This was driven by pent-up buyer demand after the spring season was embroiled in the lockdowns, and spring demand moved into summer.

By the end of summer, under pressure from the unemployment crisis, “buying will slacken and we expect home prices will show declines in metro areas that have been especially hard hit by the recession.”

And by May 2021, the national Home Price Index is expected to be down 6.6% from May this year. All states are “expected to experience a decline.” The CoreLogic Market Risk Indicator predicts that 125 metro areas have at least a 75% probability of price decline by May 2021.

The chart below from the CoreLogic report shows two data sets: The Case-Shiller Index and its forecast through May 2021 (columns); and the CoreLogic HPI (black line) and the HPI Forecast through May 2021 (light-blue line). The Case-Shiller Index, which does not include distressed sales, sees disappearing gains in 2021, but no actual price declines. The HPI Forecast, which does include distressed sales, sees a fairly steep decline roughly in parallel with the first segment of the year-over-year price declines during the housing bust:

The impact of distressed sales becomes apparent during the Housing Bust, during which the HPI (which includes distressed sales) plunged more sharply than the Case-Shiller Index (which does not include distressed sales).

In order to analyze home price trends, the HPI incorporates the “repeat-sales” data from the Case-Shiller Index, where the prices of the same house that sold at least twice over time are tracked, going back 40 years.

CoreLogic sees some particularly bad vibes for states like Arizona and Florida that are now confronting “elevated COVID-19 cases and the subsequent collapse of the spring and summer tourism market.” This “perfect storm” will curtail home purchase demand over the coming year.

This time it’s different: Cause & Effect Are Flipped

The last housing bust occurred during an economic expansion and then became one of the triggers of the Financial Crisis and the Great Recession. This time, it’s the other way around. An economic and healthcare crisis, and the worst unemployment crisis in our lifetime, is hitting a fairly strong — and in many markets an over-inflated — housing market and triggering the downturn in the housing market.

“The forecasted decline in home prices will largely be due to elevated unemployment rates,” CoreLogic said. “This prediction is exacerbated by the recent spike in COVID-19 cases across the country.”

I’ve been on CoreLogic’s email list for years, and what stood out were the unwaveringly bullish forecasts of its HPI that turned out to be more or less on target. So this sudden shift is quite something, though it makes sense based on the economic conditions and the unemployment crisis now prevailing in the US.

Rents in San Francisco are still crazy-overpriced, but less overpriced than they were. Read…  Massive Shifts Underway, Rental Market Reacts in Near-Real Time: Rents Plunge in San Francisco & Oil Patch, Drop in Expensive Cities. But Long List of Double-Digit Gainers

Wolf Richter July 7th, 2020

Posted In: Wolf Street

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