The S&P CoreLogic Case-Shiller US National Home Price NSA Index reported an annual gain of 18.8% in November. The annual rate of increase in the previous month was 19% in the previous month. 10-City Compound annual growth fell to 16.8% from 17.2% in the previous month. The 20-City Composite Index increased 18.3% year-on-year in November 2021, a slight slowdown from 18.5% in October. 11 out of 20 cities reported higher year-on-year price increases in November 2021 than in October 2021.
Home prices have been rising at a very high but slowing rate over the past few months, according to S&P. Despite this slowdown, November’s increase of 18.8% is the sixth-highest reading in the 34 years covered by the data. We can see the effects of increasing mortgage rates on house prices in the future, the direct and indirect effects of tightening and reducing MBS in the balance sheet will be seen on interest rates and demand. Households have also taken advantage of low mortgage rates during the pandemic, increasing demand, especially for single-family homes and suburban homes. After the response to the Covid pandemic, the damping in demand due to cost and price pressure is primarily driven by a reduction in purchasing power. However, the continuation of the high momentum in prices can be explained by two facts; firstly, demand is high despite everything, secondly, the price is rising both with the demand brought by low mortgage rates, and with the increasing material cost and decreasing housing stock. In other words, the price of construction materials is high due to supply problems, and the housing supply is squeezed in the squeezed market.
While the Fed shrinks the balance sheet, it will also sell on the MBS side, along with the Treasury bonds. In order to have the initiative to take an active action on mortgage rates, they can engage in a rapid portfolio dumping strategy. However, they will be careful that mortgage rates do not rise steeply, but rise in a more sustainable and manageable way. A bubble burst in the housing market would mean serious trouble, as prices would show inconsistency this time. Because many houses cannot show sufficient price elasticity to the demand shock in terms of construction cost. Tomorrow’s Fed statements will include more details on balance sheet management.
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