Could housing prices finally be coming back down to earth? Home-price growth continued to decelerate for the sixth straight month in September 2022. S&P CoreLogic’s latest Case-Shiller U.S. National Home Price NSA Index, released November 29, reports that price growth dropped by 2.3 percent from August to September — from 12.9 percent to 10.6 percent.

‘Prices declined in every city’

Prices fell in every one of the top 20 U.S. cities from August to September, the report says.

“As has been the case for the past several months, our September 2022 report reflects short-term declines and medium-term deceleration in housing prices across the U.S.,” said Craig J. Lazzara, managing director at S&P DJI, in a statement. “Despite considerable regional differences, all 20 cities in our September report reflect these trends of short-term decline and medium-term deceleration. Prices declined in every city in September, with a median change of -1.2 percent. Year-over-year gains, while still well above their historical medians, peaked roughly six months ago and have decelerated since then.”

The trend is not expected to reverse itself anytime soon, Lazzara continues: “As the Federal Reserve continues to move interest rates higher, mortgage financing continues to be more expensive and housing becomes less affordable. Given the continuing prospects for a challenging macroeconomic environment, home prices may well continue to weaken.”

The Fed and the housing market

The Federal Reserve’s aggressive moves to combat inflation have put upward pressure on mortgage rates. In November, the Fed issued its sixth consecutive rate hike of three-quarters of a percentage point. While the Fed doesn’t directly set mortgage rates, the mortgage market’s interpretations of the central bank’s moves influence how much you pay for your home loan.

The long period of low mortgage rates following the Great Recession came to an end earlier this year. This June, rates topped 6 percent for the first time since 2008. The upward trend continued in October, when rates topped rates topped 7 percent. As of late November, the 30-year mortgage rate averaged 6.81 percent.

Steve Reich, Finance of America Mortgage’s chief operations officer, highlights the impacts that these trends have on the housing market. “Home price appreciation has continued to slow as the Fed works to get inflation under control,” he said in a statement. “The gradual slowdown can be attributed to higher interest rates, which tempered what many homebuyers can afford and, in turn, softened home sales.”

Amid these conditions, Federal Reserve chairman Jerome Powell has stressed the need for a “reset” in the housing market to better align the supply of homes with demand. While Powell called deceleration of home prices “a good thing,” homeowners may feel differently.

“The remarkable rise in mortgage rates is acting as a kind of golden handcuffs, limiting the desire and some of the ability of people to move out of the homes they currently own,” says Mark Hamrick, senior economic analyst at Bankrate. “That will further pressure housing inventory, adding insult to supply injury.”

What it means for homebuyers and sellers

Both buyers and sellers will need to go with the flow in the current market. “For prospective sellers, the new status quo dictates they remain flexible on price, given the extraordinary challenges posed by the sharp increase in mortgage rates,” Hamrick says. “Those who are very motivated to purchase 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 seeking a possible downgrade of footprint or quality of home, along with the neighborhood, in order to achieve an affordable purchase.”

Reich emphasized that buying a home in today’s market is still possible: “As home prices continue to moderate, the average time active listings stay on the market is getting longer, resulting in a slightly less competitive market,” he says. “And that’s good news for homebuyers who are still in the game.”