When Fed Chairman Jerome Powell admitted last year that rising mortgage rates would cause “tough. [housing] correction,” he did not say that it will be a bifurcated correction. In some markets, like St. Louis and Boston, home prices are just a hair below the 2022 peak, while many Western housing markets like Phoenix and San Francisco are going through a sharp home price correction .
The reason for this is a bifurcated housing correction due to the fact that housing markets in the West are hypersensitive to interest rates. For one thing, Western markets are at risk of falling behind because housing prices there are so far out of line with local incomes. Second, Western markets have a high concentration of technology jobs, which are vulnerable to layoffs whenever interest rates rise.
Bad news for the Western housing market? The collapse of Silicon Valley Bank suggests more pain is on the horizon.
On the one hand, it is not clear how many tech jobs could be lost as a result of the regulator’s decision to close the largest bank of 16 countries. On the other hand, the demise of Silicon Valley Bank clearly signals that the Federal Reserve’s rate hike will cause pain in the technology sector.
“Unfortunately, house prices in the center of technology and venture capital have fallen to the highest level from the peak of 2022 to [the housing] tracked markets across the country. Any additional setbacks for technology & venture capital (currently brewing) are not appropriate,” Ric Palacios Jr., director of research at John Burns Real Estate Consulting, tweeted there.
If tech layoffs continue to rise, and mortgage rates remain elevated, it could keep the housing market in the West in correction mode. This may be true if tech layoffs accelerate at the end of the year when the housing market has moved into a slow season.
Let’s take a closer look at the data.
Among the nation’s 400 largest housing markets tracked by Zillow, 276 markets have seen local home prices decline from their 2022 peak. This includes 32 markets where home prices are down more than 5% from their 2022 peak.
So far, the largest seasonally adjusted home price declines have occurred in San Francisco (down 9.2%), Bend, Ore. (down 8.3%), Santa Cruz (down 8.1%), Boise (down 8% ), and Austin (down) 7.9%). Each of these markets, of course, has a high concentration of tech workers.
There’s no doubt about it: The loss of technical manpower, coupled with sluggish home prices, has left Western housing markets vulnerable to interest rate-induced corrections.
That said, there are other factors at play.
For example, homebuilders and iBuyers—who are more likely to cut prices during a correction—create a higher concentration of inventory in the West. As soon as Western housing markets, like Reno (down 7% from 2022 peak) and Seattle (down 6.6%), went into last summer’s correction mode, builders and iBuyers began aggressively reducing home prices.
Want to stay updated on the housing market? Follow me on Twitter @NewsLambert.
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