Home Prices Post Big Decline

By: James Flippin · October 26, 2022 · Reading Time: 3 minutes

A Big Drop in August

Amid the rise of mortgage rates, home prices are falling. In August, the S&P CoreLogic Case-Shiller National Home Price Index fell 1.1% month-over-month. It marked the second-straight monthly decline, and the largest such decrease since December 2011.

The Federal Housing Finance Agency maintains its own home pricing data, which declined 0.7% in August from July.

Of course, this dip in home prices should be kept in perspective. Over the past 12 months, prices are still up, although that pace has also moderated. In July, the Home Price Index rose 15.6% on an annual basis — 13%, in August.

The Rapid Cool Down

Rising mortgage rates are the biggest reason for this historic decline. For the week ending October 20, the average rate on a 30-year fixed-rate mortgage checked in at 6.94%. That’s 3.09% higher than where the average was a year ago at this time.

When mortgage rates rise, it reduces affordability. Higher monthly payments have left buyers hesitant to pull the trigger, leading to what some real estate analysts characterize as a “buyer’s market.” A 6% rate for mortgages appears to have become a lynch pin. With rates above that mark, prices must fall, in order to meet demand.

There is a wrinkle in the equation, however. Some contend rising rates will keep the nation’s housing stock low, as homeowners with low rates on their mortgage feel “locked in” to those lower costs — and lack motivation to sell.

Where Will Rates Go

Given the broad impact mortgage rates have on the housing market, it’s natural to try to predict where they’re headed. Because the Federal Reserve is committed to fighting rampant inflation, more hikes to the federal funds rate are expected. This influences mortgage rates and drives them higher.

Per an updated forecast from the Mortgage Bankers Association, mortgage rates are expected to fall to around 5.4% by the end of 2023. The MBA’s economists argue the nation is set to enter a recession, and the unemployment rate will rise. As the economy cools off, the Fed will likely abandon its rate hike campaign, paving the way for lower mortgage rates.

The economic slowdown is nothing to celebrate, but it could mean, at least for now, buyers hold the cards.

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