Could real estate prices finally come down to earth? Year-over-year house price growth slowed to a record pace in July 2022. S&P CoreLogic’s latest report Case-Shiller US National Home Price NSA Indexpublished on September 27, reports that price growth fell 2.3% from June to July, from 18.1% to 15.8%.
“A brutal deceleration”
Although prices continue to rise from a year ago, this is the biggest one-month decline in the history of the index. However, prices fell in 15 of the 20 major US cities from June to July.
“Although U.S. home prices remain well above their levels of a year ago, the July report reflects a sharp deceleration,” said Craig J. Lazzara, chief executive of S&P DJI, in a press release. ” As the The Federal Reserve continues to hike interest rates, mortgage financing became more expensive, a process that continues to this day. Given the outlook for a tougher macroeconomic environment, house prices may well continue to decelerate.
The Fed and the real estate market
Aggressive measures by the Federal Reserve to fight inflation put upward pressure on mortgage rates. In September, the Fed issued its third consecutive rate hike of three-quarters of a percentage point. Although the Fed does not directly set mortgage rates, mortgage market interpretations of central bank movements will influence how much you pay for your home loan.
The long period of low mortgage rates that followed the Great Recession came to an end earlier this year. Last June, rates exceeded 6% for the first time since 2008. The upward trend continued in September, when rates hit 6.73%.
Steve Reich, chief operating officer of Finance of America Mortgage, highlights the impacts of these trends on the housing market. “House price appreciation has continued to slow as the Fed strives to rein in inflation,” he said in a statement. “The gradual slowdown can be attributed to higher interest rates, which have tempered what many homebuyers can afford and, in turn, slowed home sales.”
Under these conditions, Federal Reserve Chairman Jerome Powell has stressed the need for a “reset” in the housing market to better align housing supply with demand. While Powell called the deceleration in house prices a “good thing,” homeowners may feel differently.
“The remarkable rise in mortgage rates is acting like a kind of golden handcuffs, limiting people’s desire and some of their ability to leave the homes they currently own,” said Mark Hamrick, senior economic analyst at Bankrate. “This will put further pressure on housing inventory, adding insult to injury to supply.”
What this means for home buyers and sellers
Buyers and sellers will have to go with the flow of the current market. “For potential sellers, the new status quo dictates that they remain flexible on pricing, given the extraordinary challenges posed by the sharp rise in mortgage rates,” Hamrick said. “Those who are highly motivated to buy a home should be prepared for the sticker shock associated with the increased expense of financing the purchase. Part of the flexibility that may be required of buyers includes finding a possible downgrading of the footprint or quality of the home, as well as the neighborhood, in order to achieve an affordable purchase.
Reich points out that it’s still possible to buy a home in today’s market: “As we head into the fall season and home prices continue to moderate, the average length of stay for active listings on the market lengthens, which results in a slightly less competitive market”. he says. “And that’s good news for homebuyers who are still in the game.”
