Home prices in American cities, particularly in the West, are declining as rising mortgage interest rates have reduced the pool of real estate shoppers.
In April, annual price growth in the US peaked at 21 per cent, according to the home value index of Zillow Real Estate. By last month, growth had fallen to 14 per cent. Prices in the US residential real estate market are shifting to different levels, “but it is too early to say how much prices will return to normal,” says Jeff Tucker, chief economist at Zillow.
In July, the S&P Case-Shiller index, which measures home prices in 20 US cities, posted its first monthly decline in a decade, falling 0.44 per cent. In August, the median US home price was $356,054, according to Zillow, just about $1,500 below its all-time high in June.
“The fact that prices are going down rather than going up is a defining moment,” says Tucker. “We haven’t really seen anything like this since 2010 or 2011. (…) This summer was the end of that long uptrend in home values in the US.”
As of October 6, the average interest rate on a 30-year fixed mortgage has fallen to 6.66 per cent, from 6.70 per cent a week earlier, Freddie Mac, who provides mortgage guarantees. But in the previous year, the price was fixed at 2.99 per cent. This year, mortgage interest rates rose rapidly, as the Federal Reserve halted its pandemic-era program to purchase mortgage-backed securities, in addition to raising interest rates to counter inflation.
The Mortgage Bankers Association reported Oct. 5 that mortgage applications are down more than 14 percent from the previous week. Existing home sales in August fell 19 per cent year on year, according to the National Association of Realtors.
“The industry is going to have (…) two very difficult quarters,” says Andrew Vallejo, an Austin real estate agent.
Increasing interest rates are pushing home ownership beyond the physical ability of some buyers, resulting in lower demand for homes. Tucker says buyers hit the “affordability ceiling” in April and May. Monthly mortgage payments for the average home with a down payment of 20 per cent jumped from $1,035 in August 2021 to $1,643 last month, an increase of 59 per cent.
Buyers began withdrawing from the housing market. At the same time, sellers continued to display their homes in the spring and summer, encouraged by the record prices that prevailed during the first two years of the pandemic. Home sales are starting to slow, and with real estate not being sold on the market for a long time, inventory is starting to build up – the number of homes available for purchase.
The longer they don’t sell, the more pressure will be on homeowners to lower their listed prices. According to the Case-Shiller Index, the biggest price drop in July was in San Francisco, at 3.5 per cent; in Seattle it was at 3.1 percent; San Diego is 2.5 percent.
The latest sales data represents offers that were made months ago, says Taylor Marr, deputy chief economist at Redfin Real Estate Agents, and unsold properties don’t show up at all. Ultimately, these owners will accept a lower price, further reducing the average selling price in the United States.
The decline is most severe in the western states, although it is not limited to the region. Sixteen of the 100 U.S. cities that experienced the largest drop in demand prices are in the West. The impact was most felt in expensive markets such as Seattle, Washington state or San Jose, California, where higher interest rates add up to monthly mortgage payments, or markets that have raged during the pandemic and thus have the greatest room to fall – Austin, Texas , Boise, Idaho, and Phoenix, Arizona.
San Jose is one of the fastest falling markets in the United States, according to data from Zillow. Although the median home sale price was $1.4 million, 25 percent of properties offered in August fell in price, compared to 12 percent in August 2021. Meanwhile, homes remained unsold on the market. For a longer period, prices quoted for less than two weeks have fallen about 5 per cent.
Some wealthy tech buyers pulled out of the market this year because the stock market slashed the value of shares they were planning to sell for a down payment, says Tong Nguyen, a real estate agent in San Jose.
Zillow data shows year-on-year price growth in San Jose narrowed to 2 per cent in August, down from 26 per cent in February. Nguyen says prices have fallen as sellers’ “realism” has grown more. He points out that one of the apartment sellers he represented struck a deal in March for the asking price of $608,000, but that the deal collapsed two months later when the buyer’s stock portfolio tumbled. The apartment sold for $41,000 less than it was sold last month.
Junior Torres, a real estate agent at another tech hub 840 miles north, Seattle, says he too has seen deals collapse for the same reason. Homes in good condition continue to sell within seven to 10 days, but less attractive homes for sale require “significant price adjustments”.
Manu Changotra, a real estate agent, says the San Francisco Bay Area market has rebounded somewhat since mid-August. Many offers are starting to come back, but “nobody is paying more than $100,000 over the asking price.”
She adds, “The market is changing, but a correction was necessary. It was not a very healthy market, the one we were seeing in a pandemic.”
Sellers, who have led the market since the start of the pandemic in 2020, are waking up to the new reality. Fewer properties receive multiple offers, more sellers lower the initial registration price. Austin was one of those vendor markets. Zillow data shows that annual growth in home prices in Austin peaked in January at 47 per cent, before declining to 7 per cent in August.
Katie Duchen, a real estate agent in Austin, recalled the difficulty of convincing a landlord to lower the price of a home that has been on the market for longer than expected. “It was a few months there, pricing the house was like trying to hit a moving target,” she says.
But the slowdown also allowed Austinitis Stephen and Ashley Aarons, who had been eagerly awaiting the purchase of their first home. With three children and a fourth on the way, they wanted a bigger place, but their efforts to save were stymied by high market prices. Finally, they changed their target neighborhood, and this month bought a five-bedroom home with a pool for $1.5 million – less than asking price. “It’s been a very volatile emotional journey,” Ashley says.
The real estate economist at Zillow says many acquaintances have eagerly asked if the housing market is “collapse”, in the hope that a lower price will allow them to buy a property for the first time.
“Things have changed,” says Tucker. “Very quickly, it has gone from being the best seller’s market in history (…) to being now certainly more balanced and perhaps, one might say, a buyer’s market in most parts of the country.”
Marr says the average American home stays 12 years. This means that while investors and home searchers may feel the price crunch, most homeowners will not. Instead, they simply won’t sell what they can.
For now, he adds, homeowners are “incentivized to wait”. If the real estate market is like a game of musical chairs, “Rising interest rates equals lowering music, and that only leads to more people saying, ‘I have a good chair. Why am I going?” Indeed, August home offers fell “significantly”, says Tucker. This could lead to fewer homes being offered on the market, reducing downward pressure on prices.
This swing is the essence of supply and demand and “should help to find a new fair price”.
Right now, in Sacramento and surrounding counties, there’s little to no price adjustment compared to orientation adjustment, says real estate agent Bruce Riddick. Sacramento is one of the fastest-lowering markets in the country, according to Redfin data, with more than half of sellers cutting their asking price in July, compared to about a third in July in 2021. For now, Reddick feels more Optimistically, to say this means that a home in an undesirable neighborhood may remain in the market “for two weekends instead of one” or that the buyer refuses to waive the protective terms in an emergency.
The tendency towards the buyers’ market was in the interest of two of his clients. Brent Burke and Christine Burke Mellon have shied away from the housing rush during the pandemic, fearing competition and rising prices. But worried about rising interest rates and being backed by family money, they started looking for a home this summer.
They found a three-bedroom home built in the 1950s and negotiated a $20,000 cut from the $720,000 asking price.
Although they’re happy to have a backyard big enough to be a garden, they’re cutting costs in anticipation of incurring a larger-than-expected mortgage payment due to interest rates.
Until the couple adjusts to the new monthly payments, Brent says, “every subscription will be under scrutiny for now.”