Case-Shiller

One of the most important indices that tracks the behavior of Real Estate in the U.S. is the Case-Shiller index. It uses a repeat-sales methodology, analyzing price changes of the same properties over time to measure market trends, in major metro areas in the U.S. As you can see in the chart below, it’s showing a contraction in prices. Over the last 25 years, we have seen a contraction only in two prior instances: during the GFC and the 2022. The GFC had RE as the epicenter of the crisis. In 2022, the FED tighten rates aggressively to stop inflation but we had the tailwinds of the government stimuli issued during COVID. What it seems to be going on now is that the U.S. is entering a storm: on one hand, inflation is not where the FED wants it to be, and it may not go further down due to tariffs and the fiscal stimulus (OBBB). On the other hand, long rates may be going up due to the the deficit, the debt and the expectation that inflation will spike. That translates into higher mortgage rates, which paired with high residential RE prices, make real estate affordability very low. That is a set up that we’ve seen before. We’ve gone from a sellers market, where buyers needed to fight among each other to get the property they wanted, to a buyers market, where if they put a bid and wait for a forced seller, they will not only get the property, but they will mark down similar properties around it. And that’s what seems to be going on. The problem with this set up, of it gets momentum, it might be difficulty to stop it, and the solution is not o oh lowering rates, as that is the short end of the curve; it is to show the bond market that inflation and deficits are under control. And that’s a tough sale.

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