The housing market correction, as told by 4 charts
Speaking to clients in spring 2022, researchers at John Burns Real Estate Consulting argued why the blistering US housing market would soon plunge into a correction that would see prices fall by double digits in many overheated markets. The call was bold, considering Zillow economists at the time predicted that U.S. home values would surge another 17.8% between February 2022 and February 2023.
It turns out that the JBREC researchers were not only right, they were spot on.
Not long after the Fed began raising interest rates, high mortgage rates caused the US housing market to slip into what Fed Chair Jerome Powell called “a rough patch”. [housing] Correction.” This abrupt slowdown led to a nationwide slump in home sales volume in the second half of 2022. Additionally, U.S. home prices, as measured by the seasonally adjusted Case-Shiller National Home Price Index, which had not fallen monthly prior to 2022 since 2012, have been in between June and November down 2.5%.
On the one hand, a 2.5% fall in U.S. home prices might seem insignificant given that U.S. home prices rose 41% during the pandemic housing boom. On the other hand, the fact that researchers from companies like Bank of America and KPMG believe the decline in home prices will continue into 2023 means the correction is worth watching.
To better understand what is happening regionally, wealth turned to researchers at John Burns Real Estate Consulting. They gave us access to their proprietary Burns Home Value Index (BHVI).
While national home prices have flattened somewhat in the second half of 2022, developments differ significantly by market. You could even call it a forked House price correction: Some regional markets have fallen sharply while others have barely moved.
Of the 150 major real estate markets tracked by the Burns Home Value Index, 100 markets ended 2022 with local house prices below their 2022 peak. While 50 markets, including places like Milwaukee and Miami, ended 2022, local house prices remained flat at all-time highs.
Among the declining markets, 24 regional housing markets ended 2022 with home prices down at least 5% from their respective 2022 peaks.
The vast majority of markets with sharp price declines, including places like Seattle (-8.7%) and Santa Cruz (-8.2%), are on the west coast. One reason for this is affordability: Many West Coast housing markets were already tight when it came to affordability, and rising mortgage rates have simply pushed those markets over the edge.
There’s another reason: A larger proportion of homes in the overheated West Coast housing markets are owned by iBuyers and homebuilders. Unlike primary homeowners, investors and builders are more likely to lower prices when sales halt.
The best example of the two-part real estate correction might be the contrast between Chicago and San Francisco.
During the pandemic housing boom, Chicago and San Francisco had similar paths. Both markets saw a surge in churn as remote work took hold. Both markets also still saw huge increases in property prices as demand for “space” soared during lockdowns.
However, home price trajectories in Chicago (down 0.1%) and San Francisco (down 10.5%) diverged as mortgage rates topped 5% in 2022. It all boils down to affordability: San Francisco homebuyers were already stretched to their financial limits, while Chicago buyers still had a little more breathing room to absorb the interest rate shock.
The sharp home price corrections are not only occurring in the expensive West Coast markets. This is also happening in “bubbly” housing markets, including places like Austin (-9.5% from the 2022 peak), Boise (-8.1%), Las Vegas (-8.3%) and Phoenix (-8. 9%).
During the pandemic boom, property prices in these so-called “zoomtowns” rose well above what underlying fundamentals (ie local incomes) would historically support. As long-distance migration slowed and mortgage rates soared, these “bubbling” or “foaming” boomtowns slid into sharp corrections.
Where is the house price correction headed next? While real estate researchers remain divided, they agree that the path of mortgage rates over the coming year represents the greatest uncertainty. If mortgage rates stay high, it only increases the likelihood that national home prices will fall further.
“House prices are usually the last indicator to find a bottom in a housing crisis and we still believe there is a long way to go for that to happen as long as [mortgage] Rates remain at 6% plus,” said Rick Palacios Jr., director of research at John Burns Real Estate Consulting wealth. The new home side will continue to be hit the hardest, he says. “Price cuts since the 2022 peak for homebuilders tend to be much more significant than resale, especially when you factor in the cost homebuilders pay to buy down the price for homebuyers.”
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