“I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again,” Powell told reporters.
Whenever a central bank moves from monetary easing to monetary tightening, there’s going to be an impact on a rate-sensitive sector like real estate. That impact, of course, is going to be even greater when monetary tightening comes after the asset class—residential real estate—spiked 43% in just over two years. Powell admitted that much in June. However, Powell was noncommittal as to whether the rate shock would push home prices lower.
Fast forward to September, and we no longer need to question if the housing “reset” will affect home prices. Back in June, the U.S. housing market was still just in the early innings of a sharp drop in housing activity. Since, we’ve seen housing activity, including home sales and home construction levels, go much lower. But as data rolls in for August, we now have clear evidence that the housing market downturn has moved beyond that first stage (i.e. a sharp drop in housing activity) and into the second stage (i.e. falling home prices).
“The longer that [mortgage] rates stay elevated, our view is that housing is going to continue to feel it and have this reset mode. And the affordability resetting mechanism right now that has to happen is on [home] prices. And so there are a lot of markets across the country where we’re forecasting that home prices are going to fall double-digits,” Rick Palacios Jr., head of research at John Burns Real Estate Consulting, tells Fortune.
Let’s take a deeper look at the three elements that’ll shift as we move into the second stage of the housing market downturn
Housing prices are a key component of the Consumer Price Index, when home prices go down this could help drive down inflation
Higher Mortgage Rates Are A Key Factorin Lowering Home Prices
Mortgage rates have continued to rise as Southern California heads closer to the Fall season and that has had an effect on home prices in the area as reported by The Los Angeles Times.
Rising mortgage rates are hardly a local phenomenon but are definitely starting to change the once strong seller’s market into more of a buyer’s market. For a change, buyers have had to start to drop their prices to try and attract an increasingly reluctant pool of buyers into considering a purchase.
One of the biggest changes are my buyers look at homes and they have some time to think about it now. It’s a normal market.”
According to Forbes.com, mortgage rates are two points higher than they were at the beginning of the first quarter of the year and that was after the rates had already increased more than they had at any other time in the last 28 years.
Inflation is part of the reason that mortgage rates are increasing after the consumer price index also rose to a historically high level. Part of the reason for this is the Federal Reserve’s attempts to combat inflation by raising the benchmark interest rate.
Joel Kan, an economist at the Mortgage Bankers Association (MBA) said, as quoted by Forbes.com, “Higher interest rates resulting from the Fed’s efforts to combat inflation, as well as the persistently high rate of inflation, are causing stresses for households and businesses.”
Mortgage rates, for the average 30-year, fixed-rate mortgages were as high as 5.81 in June but have gone even higher in late August. The current 30-year, fixed rate mortgage is 5.90% according to Bankrate.com.
Countries all over the world are having to do the same to combat inflation but in the United States, financial experts predict a slowdown. Wharton business school professor Jeremy Siegel said, as quoted on CNBC’s “Squawk Box Asia, “I think we only need 100 basis points more. The market thinks it’s going to be a little more — 125, 130 basis points more. My feeling is we won’t need that much because of what I see as a slowdown.” indicating that the Federal Reserve will only have to raise the consumer price index by 100 additional basis points.
Siegel points out that, according to CNBC, housing prices have dropped and in fact have “gone down by a record amount exceeding any six-month period.” These are one of the key indicators of whether inflation will continue to rise or slow and Siegel believes that this shows that a slowdown is on the way.
Once again, during May 2022, the housing market in California has seen a reduction in home sales while prices continue to rise.
House prices rose in May by 1.6% and that is up 9.9% in the last 12 months. Condo sales declined too, and in fact condo prices bucked the upward trend by falling 3.1%, although still up 14.5% vs last May of 2021.
California home prices soared 4.1% higher than March’s levels to a new record again at $884,890. Sales are slowing and fell 1.9% from March and are down 8.5% from last April.
Judging by declining sales which are uncharacteristically slow at peak buying season, Realtor’s latest outlook this month, and expected rising interest rates, the prediction is for a cooling California real estate market. Market velocity is falling at a faster rate.
The average price of a house sold in California reached another all time peak at $898,980.
When Will Home Prices Drop in California?
Californians are constantly asking if and when home prices will drop, just as the outlook for the summer is perhaps for further new records. Mortgage rates have doubled, pushing up mortgage payments, and it is hurting homeowners besieged with other record high costs. Inflation and a souring economic outlook will begin to show in home prices by summer’s end.
Rent prices too, having reached record heights are beginning to show slower growth. The rental market suffering from exceptionally low inventory will likely not show mercy to Californians for sometime. New housing development is once again slowing.
Higher priced homes in the state continue to sell well, while the low supply of affordable homes continues to shrink, making purchases less likely. The share of million-dollar home sales rose again in April to reach the highest level on record at 34.7% Homes sold below $500,000 hit and hit the lowest level recorded.
Supply is still a key matter even as prices and mortgage payments soar. California Realtors are reporting increased activity up to the week ending June 25th. Looks like a rise in new listing so the picture may be brighter for buyers desperate for a home.
Home sellers are cutting list prices as more buyers take pause: ‘The market is not the same’
Home sellers are increasingly cutting their asking prices as buyers, constrained by higher mortgage rates and overall inflation, have become less willing to jump into the housing market at any cost.
The growing number of price cuts, a trend showing up in data from Southern California and across the nation, is one of the strongest signs yet that the previously red-hot market, fueled by low mortgage rates and all-cash bidding wars, is cooling.
The price reductions don’t mean overall home values are dropping. In Southern California and the wider U.S., they make up a minority of listings, and most homes still sell for more than the list price.
Industry experts, for now, do not see a plunge coming in the housing market, catapulted to record-high prices in the first two years of the pandemic as many people sought out more space and had new savings to spend.
Values could come down modestly, some experts said, if the Federal Reserve’s actions to tame inflation send mortgage interest rates significantly higher — or tip the economy into recession.
For buyers, the market already feels significantly different from the frenzied competition of several months ago.