A key piece of economic data was released last week: the consumer price index (CPI), which measures inflation. And why is inflation worth watching? Because it was one of two key factors—the other was concerns about non-US economies—that the Federal Open Market Committee cited in September when it passed on raising interest rates.
Surprising almost no one, the new September CPI figures were largely lackluster. For the month, CPI fell 0.2%, as was expected, and was flat for the year.
However, a closer read shows that housing has been one area of continued pricing strength:
- The shelter index, which is composed of both owners' equivalent rent and actual rent, rose 0.3% in September, 0.2% in August and 3.2% over the last 12 months.
- The rent index increased 0.4% in September after jumping 3.7% in the last 12 months.
- The index for owners' equivalent rent increased 0.3%.
'The Negative Equity Epidemic Is Lifting'
Beyond rent, there has been a solid increase in actual home prices over the past several years. That can be seen in the improvement in the number of homes with positive equity—that is, a house that's worth more than the homeowner owes. It's important to note that home price increases have varied significantly by region—and in many cases these variances can be seen within regions.
CoreLogic, which monitors homeowners' equity, recently put out a report indicating that rising home prices resulted in 759,000 houses regaining positive equity in the second quarter. The report went on to say that, "For much of the country, the negative equity epidemic is lifting. The biggest reason for this improvement has been the relentless rise in home prices after the last three years, which reflects increasing money flows into housing and a lack of housing stock in many markets."
Indeed, the numbers confirm this shift:
- In the second quarter of 2013, more than 35% of homeowners had either negative equity or were under-equitied (below the 20% threshold).
- In the second quarter of 2015, fewer than 27% of homeowners had negative equity or were under-equitied.
This is important because homeowners who return to 20% equity or more can likely avail themselves of much lower mortgage rates—something many couldn't do in the wake of the global financial crisis because they didn't meet those stricter credit standards due to low or no equity. Many of these same homeowners are now eligible for refinancing, and chances are they will rush to do just that, trading in mortgages at 6.5% and higher, in most cases, to rates at 4% or lower.
Keep in mind that the ability to refinance to significantly lower rates has important implications. It will translate into significant additional money in consumers' pockets, some of which they are likely to spend.
Where Housing Goes, Will the Rest Follow?
So will home prices continue to recover from here? CoreLogic thinks so, predicting an additional 4.7% increase in the next year. We at Allianz Global Investors are of a similar mindset, although we believe there will be great variance by region. Steadily improving employment and continued low mortgage rates will help. In fact, last week, Treasury yields again dipped below 2%—which usually means mortgage rates will move lower as well.
What's more, credit standards have been easing over the past few months. If this continues—and it should—first-time home buyers in particular will benefit, and they've so far been an area of weakness within the housing recovery. Contrary to public opinion, people still want to own homes, so we're likely to see more people buy houses if they can meet credit standards. The National Association of Realtors released survey results last week showing 84% of Americans currently think buying a home is a good financial decision, which is a significant increase from 73% in 2011.
Keep in mind that rising home prices don't just help homeowners refinance; they also help boost Americans' perceptions of their net worth, which in turn usually results in increased spending. This is called "the wealth effect."
Data Due on the American Dream
A slew of data points on the state of the housing market are due to come out this week, which should give us more insight into its current positioning. In the coming months, we will be following the housing situation closely to understand how many more Americans are looking to realize their dream of home ownership—and whether or not they'll help the housing sector continue its recovery.
Kristina Hooper is the US Investment Strategist and Head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law, a master's degree from Cornell University and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
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The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
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