Home Prices Surge at Record Pace on Low Mortgage Rates

U.S. home prices gained at a record pace in May from a year earlier, according to two reports released on Tuesday, as low mortgage rates fueled bidding wars.

S&P CoreLogic Case-Shiller index of property values put the annualized gain at 16.6%, an all-time high in data going back 33 years, compared with a gain of 14.8% in April. In a report from the Federal Housing Finance Agency measuring properties bought with loans back by Fannie Mae and Freddie Mac the gain was 18% in May, also a record.

Home prices are surging as low mortgage rates allow borrowers to get bigger mortgages, making it possible to bid higher on properties in a market where listings are scarce. Some help may be on the way, according to a report last week from the National Association of Realtors that showed the number of homes listed for sale at the end of May was up 7% from the prior month.

“Low inventories continue to boost home prices, but the pace of appreciation may be starting to slow as more inventory comes to the market,” Charlie Dougherty, a Wells Fargo economist, said in a note to clients on Thursday. “While home buying activity has cooled off this year alongside shrinking inventories and skyrocketing prices, underlying demand for homes remains strong.”

Phoenix, San Diego and Seattle reported the biggest gains among 20 cities tracked in a separate home-price index from S&P CoreLogic Case-Shiller. Phoenix saw a 25.9% year-over-year price jump, followed by San Diego with a 24.7% increase and Seattle with a 23.4% gain.

When mortgage rates decline, home-loan applicants often find they qualify for bigger mortgages because the loan payment is measured against their monthly income. Cheaper borrowing costs lower their monthly mortgage bill, meaning they sometimes can get bigger loans and bid higher for a home they want.

Last week, the average U.S. rate for a 30-year fixed mortgage was 2.78%, the lowest since mid-February, according to Freddie Mac. The lowest rate ever recorded in more than five decades of Freddie Mac data was the 2.65% seen in January’s first week.

Surging home prices are making it tougher for young families to get a home, NAR said in its report last week. First-time buyers were responsible for 31% of sales in May, matching April’s level but down from 34% in May 2020, NAR said.

"Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market,” said Lawrence Yun, NAR’s chief economist. “Supply is expected to improve, which will give buyers more options and help tamp down record-high asking prices for existing homes."