Across the country, mortgage brokers and builders are scrambling as millions of potential buyers sit on the sidelines after last year’s historic mortgage rate shock. The numbers aren’t good: On a year-over-year basis, mortgage purchase applications are down 36.4% and existing home sales are down 35.4%.
When housing transactions become free in the second half of 2022, housing prices will not be affected. Through October, seasonally adjusted US home prices fell just 2.4%, as measured by the Case-Shiller National Home Price Index. On the one hand, this marks the second largest house price correction in the post-World War II era. On the other hand, it is mild compared to the 26% peak-to-trough US house price crash from 2007 to 2012.
In the near future, Moody’s Analytics chief economist Mark Zandi expects the story to begin to change: Free home sales will decline, while home price correction will take place.
“Housing demand (home sales) is close to a trough, housing supply (home starts and completions) has not decreased, and home prices need to be done before they reach their nadir,” Zandi said. fortune.
While US home prices are falling, Zandi expects to be 10% below the peak by 2022. He’s not the only economist who thinks home prices will continue to fall: Among the 24 leading house fortune tellers tracked by fortune17 predict that US home prices will decline again in 2023. (Seven other firms think that US home prices will remain flat or increase by single-digit amounts in 2023).
“The downturn in the housing market, triggered by the rapid increase in the cost of mortgage loans, continues to be of great concern to us. Prices have risen significantly in recent years because demand exceeds the limited supply of housing, but this process will reverse,” wrote James Knightley, chief international economist at ING. The company expects about a 10% increase in U.S. home prices.
Remember, when groups like ING or Moody’s say US house prices, they’re talking about the national aggregate. Whatever comes next will vary by market. After all, there’s a reason industry types like talking real estate is local.
To better understand the regional house price story, fortune check out the Zillow Home Value Index (ZHVI) for November 2022.*
Through November, home values in 254 of the nation’s 400 largest housing markets were below their 2022 peak. In those markets, the average decline was 2.1%.
“Home values fell 0.2% in November, continuing a slow decline that began this summer. Once again, the proximate cause can be traced to high mortgage rates,” Zillow researchers wrote. “When the national prices just inched down, they slumped more dramatically in many previous-hot housing markets.”
The market is the hardest because the correction falls into one of two groups.
The first group are boomtowns, often second-home markets or up-and-coming cities, where remote workers have moved during the pandemic and pushed local housing prices beyond what local incomes can support. The “froth” can explain why home prices fall faster in boomtown markets like Coeur d’Alene, Idaho (where home values fell 10.8% from the peak); Austin (down 10.4%); Phoenix (down 8.1%); Las Vegas (down 8%); Salt Lake City (down 7.9%); and Reno (down 7.6%).
The second group includes high-priced markets on the West Coast, including places like San Jose (where home values are down 10.6% from their peak); San Francisco (down 9.5%); Santa Cruz, California (down 8.4%); and Seattle (down 5.8%). Historically, these top markets are vulnerable when the stock market enters bear territory or mortgage rates rise. Of course, both of these red flags occur in 2022.
While home prices in 254 major markets are below their 2022 peak, 146 other major markets remain at their 2022 peak. The ongoing mortgage rate shock has yet to cause home values, as measured by Zillow, to fall in markets like Indianapolis, Miami, and Philadelphia.
So, the coast is clear in markets like Miami and Philadelphia, right? Not so fast, said Moody’s.
While the home price correction hasn’t affected tight inventory markets like Miami and Philadelphia, it’s still possible this year. Moody’s expects home prices to decline this year in every major regional housing market. In cities like Miami and Philadelphia, Moody’s expects peak declines of 16.9% and 5.3%, respectively. (This is Moody’s outlook for the nation’s 322 largest markets.)
While the ongoing housing downturn has translated into the US housing market flipping from inflation-mode to deflation-mode, it has barely touched the gains accrued during the Housing Boom Pandemic. In October 2022, US home prices were still 38.1% above March 2020 levels.
Even in the housing markets hardest hit by the correction, including San Francisco (down 9.5% from 2022 peak) and Austin (down 10.4% from 2022 peak), prices remain well above pre-pandemic levels. Indeed, in October, home values in San Francisco were 16.9% above pre-pandemic levels, while in Austin they rose 57.1%.
*Note: The Zillow Home Value Index (ZHVI) is a measurement of typical home values in a given area. According to Zillow, the index “represents typical values for homes in the 35th to 65th percentile range.” fortune pulled ZHVI’s “raw version” which not seasons are arranged.
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