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U.S. home prices increased at the fastest pace in seven years in January as the pandemic has fueled demand for single-family houses even as the supply for such homes shrinks.
The S&P CoreLogic Case-Shiller 20-city home price index, released Tuesday, rose 11.1 percent in January from a year earlier. That’s the biggest gain since March 2014. Prices rose in all 20 cities, and the 12-month increase was larger for all cities in January than in the previous month.
“January’s data remain consistent with the view that COVID has encouraged potential buyers to move from urban apartments to suburban homes,” said Craig Lazzara, managing director and global head of index investment strategy at S&P DJI.
It’s not yet clear whether that trend will fade as the pandemic is brought under control, Lazzara said, or if there will be a permanent shift higher in demand.
Boston saw a 12.7 percent increase in home values over the course of 2020
The biggest price gain was in Phoenix, where home prices jumped 15.8 percent, followed by Seattle, with a 14.3 percent gain, and San Diego, at 14.2 percent.
Home sales have jumped in the past year, driven by a desire for more space among those Americans fortunate enough to keep their jobs. With roughly one-quarter of workers doing their jobs from home, along with children going to school online, families have sought out houses rather than apartments, or moved to larger homes.
Yet that trend has run into a reluctance among many Americans to sell their homes – and have legions of potential buyers parade through their living rooms – during the pandemic.
The number of available homes collapsed nearly one-third by February compared with a year earlier, to just over 1 million, according to the National Association of Realtors. That’s the sharpest yearly drop on records dating back to 1982.
Higher mortgage rates may slow sales a bit in the coming months, but borrowing costs remain near historic lows. The average rate on a 30-year fixed mortgage rose to nearly 3.2 percent last week, the highest since June, up from 3.1 percent the week before. That’s still below the pre-pandemic rate of 3.5 percent.
Sales of new and existing homes fell sharply in February, mostly because of unseasonably cold winter weather and ice storms in Texas and other southern states. Yet existing home sales were still 9 percent higher in February compared with a year ago.
Lower mortgage rates have generally helped keep homes affordable for many Americans despite rising prices, a new report from First American Financial Corp. found.
“For example, let’s assume you earn $100,000 a year, have a 33 percent debt-to-income ratio, and put down 5 percent on a home. With a 4 percent mortgage rate, your house-buying power is $606,000. But, if rates fell to 3 percent, your house-buying power increases by $80,000. Our Real House Price Index (RHPI) adjusts nominal house prices for purchasing power by considering how income levels and interest rates influence the amount one can borrow,” Mark Fleming, chief economist at First American, said in a statement. “The ability of low or declining interest rates to boost house-buying power makes it possible for a housing market to have high or even rising nominal house prices yet remain highly affordable (as measured by the RHPI) and vice versa. Indeed, a walk down house price memory lane shows us that nominal house prices alone are not always a good measure of affordability.”
However, the report spotlighted Massachusetts as seeing one of the worst year-over-year declines in house-buying power in the nation, a drop of 7.4 percent, with the Boston area seeing an 11.4 percent drop.
