September 2022 Erdmann Housing Tracker Update

There are a few cities with high cyclical price appreciation, but my model shows only a small amount of cyclical price deviation on average nationally. Part of the reason is that when Covid hit in March 2020, prices were at cyclical lows because the Fed had started raising rates several years earlier, and by 2019, they were lowering their target rate back down because the economy was marginally looking as if recession was possible.

I push back here against interest-rate focused opinions about valuation, and that is one example of why. Mortgage rates declined quite a bit from the end of 2018 to March 2020, and price trends leveled off. That’s because lower interest rates can be associated with recessionary conditions. Analysts pushing the idea that high mortgage rates will lower home prices don’t generally seem to notice this recent history.

So, while prices have risen cyclically since mid-2020, some portion of that rise was from a baseline that was below neutral. The choice of baseline is somewhat arbitrary, but the question is really how far below neutral were pre-Covid prices rather than whether they were below neutral.

Here is a chart of the estimated price deviations in the average ZIP code in Seattle, updated through September. Seattle has had some cyclical contraction in the last couple of months. Where Seattle is concerned, there just hasn’t been much cyclical variation. The tracker doesn’t suggest there is much room for a cyclical reversal there. The average Seattle home is overvalued, to the tune of a little more than 20%. That’s mostly a combination of mortgage suppression pushing the price down more than 20% while rising rents due to inadequate supply push the price up more than 40%. Reversing the 20%+ positive net price deviation will require a building boom.

There is no hard and fast rule that says cyclical variation has to stop at zero. Most cities were moderately below a neutral valuation in 2019. But, it is likely that the Fed will stimulate economic activity in general if that becomes the case, preventing relative prices from declining too far.

For regular paid subscribers, the file with the national data is below the pay wall. And, today is the last day to sign up as a founding member to receive the data from 26 of the largest metropolitan areas at the temporarily reduced price of $200 annually. Each metro has its own unique patterns, such as the patterns shown for Seattle in the figure. I will e-mail the metro area file out to founding members later today.