The Big Idea

A rising tide lifts all homes

Stephen Stanley | June 3, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

There have been widespread reports that housing demand is finally cooling as the surge in home prices and mortgage rates has dented affordability. Momentum is likely moderating, but the housing market through early 2022 remained torrid.  Recent data on home prices through March show rapid appreciation across the country as well as the ongoing migration in the US from the urban areas of the Northeast and Midwest to the West and South. Fed policy may take some of the heat off housing, but broad secular forces are at work, too.

FHFA data

The Federal Housing Finance Agency or FHFA is the regulator that oversees Fannie Mae and Freddie Mac. In addition to the agency’s oversight responsibilities, it maintains a database of home sales and refinancing transactions that are ultimately sold by originators to Fannie and Freddie.  This database has enabled the creation of the FHFA home price index, which tracks price changes for specific properties over time, allowing an apples-to-apples comparison of how home prices are evolving nationally, regionally and locally.

FHFA home price data are released monthly, but the comprehensive reports are published quarterly. In the quarterly reports, FHFA releases data at the national, regional, state, and MSA levels. These data are far more comprehensive than other published home price data such as the S&P CoreLogic Case-Shiller data, which focus on 20 of the largest cities in the country. The FHFA quarterly reports offer an especially insightful look at local housing markets.

National data

The national FHFA home price index surged in the first quarter at the second-fastest pace since the series started in 1990.  The 4-quarter increase accelerated to 18.7%, a record high (Exhibit 1).

Exhibit 1: FHFA home price index

Source: FHFA.

State data

The FHFA data by state show the near-universal breadth of the upswing in home prices over the past four quarters.  All 50 states posted gains of more than 10% over the past four quarters, although Washington D.C. lagged, at +6.6%.

Most states in the West and South posted home price appreciation of 20% while the large states in the Northeast and Midwest generally lagged (Exhibit 2).

Exhibit 2: FHFA home prices by state

Source: FHFA HPI®

These data suggest that the population continues to migrate out of the expensive traditional population centers and to suburban and more rural areas, as well as movement to lower-tax states and regions with warmer weather.

MSA level data

The FHFA calculates home price indices for more than 400 cities, offering a comprehensive look at local trends.  The top 20 and bottom 20 MSAs out of the largest 100 ranked by pace of appreciation provide a stylized but usually accurate summary of the key developments in the market.

Over the past four quarters, the top 20 MSAs in home price appreciation—an MSA needed to record over 23% price increases to make this list—were mainly mid-sized Sunbelt cities.  Florida had seven of the top 20 cities, including the top four.  Elsewhere in the Southeast, Knoxville, Raleigh, Nashville and Charleston made the list.  The Southwest was well represented, as Texas had three and Arizona had two.  In the West, Las Vegas, Salt Lake City, and three California MSAs posted top-20 appreciation rates.

Broadly, the cities that are doing best are mainly up-and-coming locales with good weather and relatively low but rapidly rising cost of living.

In contrast, the bottom 20 MSAs in terms of price appreciation over the past four quarters is mostly a collection of old-line cities in the Northeast and Midwest.  In the Northeast, Cambridge MA, Washington D.C., Frederick MD, New York City, Baltimore, Philadelphia, Bridgeport CT, Wilmington DE, Hartford CT, and Nassau/Suffolk County NY were all laggards—although,to be fair, even the bottom 20 were in a range of 9% to 13% appreciation, a historically rapid pace of advance.  In the Midwest, Minneapolis, Milwaukee, Pittsburgh, Chicago, Dayton OH, and Detroit were all in the bottom 20.  San Francisco also posted a relatively low pace of increase, reflecting high housing costs, crime, and the exodus of remote tech workers. Ten of the largest 13 cities in the US as of 1950 were in the bottom 20 for home price appreciation in the first quarter, so the old, traditional population centers appear to be losing households to younger, up-and-coming cities in the South and West.

Secular versus cyclical moves

The across-the-board strength in housing over the past two years reflects both the general strength of the economy, spurred by extremely aggressive pandemic-era fiscal and monetary stimulus, as well as longer-lasting secular forces.  As part of cooling the economy by enough to bring inflation under control, the Federal Reserve will need to restrain the torrid housing market.  As noted above, given the sharp rise in mortgage rates so far this year, that process has likely already begun, even though the home price data through the first quarter do not show it.

However, in addition to cyclical swings, the strength in the housing market over the past two years reflects longer-lasting forces that are unlikely to be completely reversed, no matter how tight monetary policy becomes.  In particular, the pandemic has encouraged a migration from densely packed urban centers to less-crowded venues. For the housing market as a whole, this theme produced a massive increase in household formation, as those who were doubling or tripling up elected to try to find their own spaces.  It is also producing winners and losers, as detailed above. With the broadening acceptance of work from home, households are moving to places where they want to live instead of being tethered to their employers’ offices.

Census Bureau data released last week offered an update on these population flows.  New annual estimates, reflecting changes over the 12 months from the 2020 Census to mid-2021 showed that the population fell by 1.7% collectively in the largest nine cities.  The two exceptions among that group were Phoenix and San Antonio, consistent with the Sunbelt theme.

For the three largest cities, New York City lost 3.5% of its residents in a year, Los Angeles lost 1%, and Chicago shed 1.6%.  San Francisco lost a stunning 6.3% of its population.  Both Chicago and San Francisco saw their populations decline below 2010 levels.

Even midsize cities with population of 500,000 to a million saw their populations inch lower, collectively losing 0.7%.  Of that group, San Jose registered the largest drop.  Even those cities with population between 100,000 and 500,000 were largely flat.  These former city dwellers are leaving for the suburbs and exurbs.  Cities with 50,000 to 100,000 in population saw growth, with seven of the 10 fastest-growing cities of this size in Texas and Arizona.

Two things are likely to happen in the housing market over the next few years.  Overall demand will need to be dampened by the Fed, so that home price appreciation and the pace of sales will likely slow nationally.  Underneath the broad cyclical movements, the mass migration of the population from the upper right quadrant of the US to the South and West and from big cities to less-crowded towns and cities will probably continue.