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Could housing prices finally be coming back down to earth? Year-over-year home-price growth decelerated at a record-setting pace in July 2022. S&P CoreLogic’s latest Case-Shiller U.S. National Home Price NSA Index, released September 27, reports that price growth dropped by 2.3 percent from June to July — from 18.1 percent to 15.8 percent.
‘A forceful deceleration’
While prices are still growing compared with a year ago, that’s the largest one-month decline in the history of the index. Prices fell in 15 of the top 20 U.S. cities from June to July, however.
“Although U.S. housing prices remain substantially above their year-ago levels, July’s report reflects a forceful deceleration,” said Craig J. Lazzara, managing director at S&P DJI, in a statement. “As the Federal Reserve continues to move interest rates upward, mortgage financing has become more expensive, a process that continues to this day. Given the prospects for a more challenging macroeconomic environment, home prices may well continue to decelerate.”
The Fed and the housing market
The Federal Reserve’s aggressive moves to combat inflation have put upward pressure on mortgage rates. In September, the Fed issued its third 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 will 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 September, when rates reached 6.73 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 has tempered what many homebuyers can afford and, in turn, has 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 emphasizes that buying a home in today’s market is still possible: “As we head into the fall season and 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.”