It’s finally happening. After soaring 40% from pre-pandemic levels in the biggest boom in decades, home prices peaked in June and started to fall in July. That’s the startling, sudden change revealed in a new data set just released by the American Enterprise Institute’s Housing Center, a leading source for detailed city-by-city figures on everything from housing appreciation to inventories and mortgages. originations. “The market has just reached a tipping point,” says Ed Pinto, director of the AEI Housing Center. “Prices will continue to fall nationally from August to December. We are likely to see declines in about four out of five metropolitan areas in some of the next few months.”
Until now, the AEI had measured prices primarily on a year-over-year basis. And by that yardstick, housing was still looking strong in June. That month, the AEI found that the median home value had grown 15% since June 2021. But its data also showed that, over the 12-month span, “home price appreciation,” or HPA, it was decelerating rapidly, slowing down substantially. from a peak of 17.5% in April. The question the pushback raised for America’s homeowners: What’s going on? right nowweek to week or month to month? Is it possible that in my city, in Atlanta, Phoenix or Raleigh, prices are really starting to go up? decline?
The new data from the AEI respond to that query. The measure shows price changes from one month to the next. The numbers therefore provide a close-up view of precisely when the patterns change, by how much, and what the moves portend. They are a guide to read the pulse of the market. AEI’s figures are based on actual closings for the month, as recorded in public records. Pinto implements a methodology that compares sales of homes of similar quality, removing distortions from changes in the sales “mix,” for example, a misleading rise in average prices as a higher proportion of expensive homes are sold in June than in May.
A staggering number of markets are already posting declines
The AEI calculated the figures for the 50 most active housing markets in the country. those of the AEI table, “Home Price Appreciation (Month over Month)”, shows changes from one month to the next from the beginning of 2019 to June of this year. Let’s start with the national data. The broader market has been in such relentless turmoil, for so long, that only twice in that period have prices retraced, and each time just 0.1%. As recently as January, the US monthly HPA was 2.6%, falling in May to a still strong 1.1%. But in June, the appreciation reached a virtual free fall, shrinking to just 0.2%.
Behind that national downsizing are staggering reversals in several cities that were thriving just a few months ago. In June 2021, only four metro areas showed a drop in prices from May and last year, the only loser from May to June was Louisville with a low of -0.1%. In April, not a single one of the fifty meters suffered a decrease compared to March. But this June, no fewer than 21 stores suffered drops from their May prices, some of them big. Overall, the steepest declines were in pricey West Coast markets, as well as Western metropolitan areas that gained legions of shoppers from the California exodus. Eleven of the most affected addresses fit into this category. The biggest loser was San Francisco with -3.8%, followed by San Jose (-3.2%). Other Western cities posting large declines include Seattle (-1.8%), Los Angeles (-1.5%), Portland (-1.3%), Denver (-0.9%) and Phoenix (-1.3%). -0.6%). Nearly all of these metro areas were booming in February, with San Francisco up 2.8% from January, San Jose up 3.9%, and Seattle up 3.5%.
“The clearest trend is the pullback in these West Coast cities and those influenced by the California craze,” says Pinto. In these places, gigantic price increases over the past two years from already expensive levels have diminished affordability so much that rapidly thinning lines of buyers are hitting values despite historically low volumes of homes in sale. From the fourth quarter of 2019 to the first quarter of this year, prices increased from $1.2 million to $1.6 million in San Joe, from $575,000 to $819,000 in Seattle, from $466 to $623,000 in Denver, and from $340,000 at $516,000 in Phoenix. The only Western markets that still showed strength were Las Vegas, a place that is cooling off but still up 0.2% from May, and Boise, where prices rose 1.8%, holding a record high. Steady progress month after month. Boise continues to thrive as a favorite destination for work-from-home California refugees who can sell a home in, say, San Jose, get a much larger residence at half the cost in their adopted hometown, and still put down hundreds of thousands of dollars.
In recent months, the hottest markets have been clustered in the Sunshine State. Cape Coral, which saw year-over-year increases in the mid-30% range, is rapidly regressing (you can read my recent article on the Cape Coral market here). Its 2.8% gain from April to May changed to a negative 1.0% in June. Tampa, North Port, Orlando, Jacksonville and Miami are well below February’s gains but still advanced between 0.2% and 1.1%.
By contrast, several older metro areas that didn’t experience big price increases have shown remarkable resilience, for one simple reason: Many are still relatively cheap. St. Louis, Nashville, Boston, Providence, Philadelphia, Kansas City, Columbus and New York ranked in the top 10 for earnings from May through June. Tied for first place with Boise the Big Applewhich posted a 1.8% monthly increase and is one of the few stalwarts to appear on an upward trajectory.
The June downdraft radically transforms the outlook for this year and 2023
Pinto also gets a good look at where prices are headed by studying Optimal Blue’s “rate lock” data. Those numbers reflect prices for sales contracts that will close in about 90 days. For Pinto, the rate-locked trend points to a drop in prices, nationally, from July to December 2022. “We expect the national month-on-month HPA to be negative in July for the first time in years,” he says. . “From there, prices should fall between 3% and 5% from June levels by the end of the year. Those total increases will gradually accumulate over the seven months from June to December.” By the end of the year, Pinto expects home prices to still be 4% to 6% above December 2021, but likely to continue to decline.
Pinto forecasts that if overall prices fall by about 4% between now and the end of the year, a far larger number of metro areas than the 21 that were negative in June will soon see month-over-month price declines. “I wouldn’t be surprised if some months, we see 40 cities showing declines,” he says.
So where does Pinto see stocks heading in 2023? It would seem that if prices fall in December, they will continue to fall through most of 2023. But that’s not necessarily the most likely scenario, says Pinto. “We have seen a decrease in mortgage rates in the last few weeks from 6% to around 5.5%,” says Pinto. “If rates continue to fall, that would fuel appreciation.” He points out that although inventories are growing, stocks remain extremely tight. “We’re still about a month’s supply away at the current level of demand,” he says. “To get declining prices, we would need to see seven ‘months of supply,’ and that could be a long way off.” For Pinto, it is very possible that a combination of stable or falling rates and limited volumes of homes for sale could sustain gains of 4% to 6% next year.
Still, Pinto says it’s never been harder to predict the future of housing. “There are so many factors that push and pull in different directions,” he says. “My crystal ball is getting cloudy.” The new monthly figures from the AEI allow owners to watch the course of the market, not only over long periods, but as it evolves. People are very anxious about what today’s tumultuous times mean for the future of their greatest asset. They want to see if the value of their colonial ranch increased or decreased in the last 30 days. Now they can. AEI numbers do not give owners a crystal ball. But following AEI’s up-to-date data will keep your thumb on the pulse of the market that, for most Americans, counts far more than any other.
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