Housing Prices’ Growth Rate is Slowing but Prices Remain Sticky

Record-breaking Slowdown

The low-interest rate environment of the years leading up to 2022 fueled a red-hot housing market, with home prices marching higher seemingly every month. Amid the Fed’s current efforts to combat inflation, the pendulum is beginning to swing in the opposite direction. Would-be homebuyers face elevated prices and more expensive mortgages, causing demand to drop. At the same time prices are growing at a slower pace. On an annual basis, prices are up 17.3% – that’s down 2% month-over-month. But prices remain sticky due to a shortage in supply.

Taking a historical perspective, in the housing crash of 2007-2009, the biggest one-month slowdown was just over 1%.

Shrunken Inventory

Part of the supply shortage is a fallout from strong demand during the pandemic, which exacerbated an already low housing stock. Current inventory is about 54% lower than in the 2017-2019 time period.

Ben Graboske, president of Black Knight Data & Analytics, estimates there is an existing “national shortage of more than 700,000 listings.” This may be good news for recent buyers who worry a downturn could leave them with significantly reduced equity. Even when demand is constricted prices can hold firm due to such short supply.

Stubborn Prices

Despite today’s average mortgage rates being nearly double those offered at the beginning of the year, national home prices aren’t expected to drop in many markets. The average 30-year mortgage — currently just over 5% — was 6% in June vs. 3% in January. There are some pockets where prices have declined. Included are markets that notoriously commanded the highest prices in the country: Seattle, Denver, and San Francisco.

Market observers contend the current cooling trend would need to continue for about six months before price growth returns to long-term averages. This reflects the lag between when interest rate increases are reflected in home prices. There is some good news for current homeowners. Tighter underwriting coupled with price appreciation have left most with record-high levels of equity, in sharp contrast to the overleveraging observed during the Great Recession.

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