Speaking to clients in the spring of 2022, researchers at John Burns Real Estate Consulting made the case for why the overheated U.S. housing market is headed for a correction in which prices will double down in many overheated markets. The call is bold, as Zillow economists predict that US home values will increase by 17.8% between February 2022 and February 2023.
It turns out that the JBREC researchers weren’t just right, they were right.
Shortly after the Fed began raising interest rates, spiked mortgage rates caused the US housing market to enter what Fed Chairman Jerome Powell called “tough. [housing] correction.” The sudden weakness caused the volume of home transactions to fall across the country in the second half of 2022. In addition, US home prices as measured by the seasonally adjusted Case-Shiller National Home Price Index, which before 2022 did not fall every month. since 2012, it declined 2.5% between June and November.
On the one hand, the 2.5% drop in US home prices may seem insignificant given that US home prices rose 41% during the Housing Boom Pandemic. On the other hand, the fact that researchers at companies like Bank of America and KPMG estimate that the decline in house prices will continue until 2023 means that the correction should be monitored.
To better understand what is happening in the region, fortune reached out to researchers at John Burns Real Estate Consulting. They provide access to the Burns Home Value Index (BHVI).
While national home prices are expected to decline slightly in the second half of 2022, the story varies by market. You can even call a bifurcated front price correction: Some regional markets have fallen sharply, when people have just moved.
Among the 150 major housing markets tracked by the Burns Home Value Index, 100 markets finished 2022 with local home prices below their 2022 peak. While 50 markets, including places like Milwaukee and Miami, finished 2022 with local home prices remaining at their highest.
Among the declining markets, 24 regional housing markets ended 2022 with home prices down at least 5% from their 2022 peak prices.
Most of the markets with clear drops, including places like Seattle (-8.7%) and Santa Cruz (-8.2%), on the West Coast. One reason is affordability: Many West Coast housing markets already have affordability wise, and rising mortgage rates are only pushing that market over the edge.
There’s another reason: A higher share of homes in the overheated West Coast housing market are owned by iBuyers and home builders. Unlike primary home owners, investors and builders are more likely to drop prices if sales stall.
The best example of a bifurcated housing correction can be the contrast between Chicago and San Francisco.
During the Housing Boom Pandemic, Chicago and San Francisco had similar paths. Both markets are seeing an increase in migration due to remote work. Both markets are also still experiencing rising home prices as demand for “space” increases during lockdowns.
However, the trajectories of house prices in Chicago (down 0.1%) and San Francisco (down 10.5%) differ as mortgage rates cross 5% in 2022. , while Chicago buyers still have a smaller breathing room to absorb the shock level.
The sharp home price correction isn’t just happening in the expensive West Coast market. This is also happening in the “bubbly” housing market, 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, housing prices in these so-called “Zoomtowns” rose beyond the fundamentals (ie local income) that would historically support them. After remote migration slowed and mortgage rates rose, the “bubbly” or “frothy” boomtown entered a sharp correction.
Where is the next house price correction? While real estate researchers remain divided, they agree that the trajectory of mortgage rates in the coming year is the biggest uncertainty. If mortgage rates stay up, it only increases the likelihood that national home prices will fall.
“House prices are usually the last indicator of finding a floor in a housing downturn, and we still think there’s a good amount of time before that happens. [mortgage] fixed rates are 6% plus,” Rick Palacios Jr., director of research at John Burns Real Estate Consulting, told me fortune. The new front, he said, will continue to be the hardest. “Price cuts from the 2022 peak for homebuilders are typically more important than resale, especially when you consider the costs builders are paying to buy rates for homebuyers.”
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