It is finally happening. After rising 40% from pre-pandemic levels in the biggest boom in decades, house prices peaked in June and started to drop in July. This is the extraordinary and sudden change revealed in a new set of data just introduced by the American Enterprise Institute’s Housing Center, a leading source of city-by-city insight into everything related to housing, from appreciation of stocks and mortgages. “The market has just reached a tipping point,” says Ed Pinto, director of the AEI Housing Center. “Prices will continue to drop on a national basis from August to December. It is likely that we will see dips in about four out of five subways in some of the next few months ”.
Until now, the AEI had measured prices mainly on a year-over-year format. And with that metric, homes still looked strong in June. That month, the AEI found that the value of an average home had grown by 15% since June 2021. But its data also showed within 12 months that the “house price appreciation” or HPA, it was slowing down rapidly, sharply falling. from a peak of 17.5% in April. The question the retirement posed to America’s homeowners: what’s going on right now, from week to week or from month to month? It is possible that in my hometown, in Atlanta or Phoenix or Raleigh, the prices are really fixing decline?
The new data of the AEI answer this question. The measure shows the price changes from month to month. Hence, the numbers provide a close view of when the patterns change, how much and what the moves foreshadow. They are a guide to reading the pulse of the market. The AEI data is based on the actual closures of the month, as reported in the public records. Pinto implements a methodology that compares sales of homes of similar quality, eliminating bias due to changes in the sales “mix”, such as a deceptive increase in average prices as a larger share of expensive homes are sold in June than in May.
A staggering number of markets are already experiencing declines
The AEI has calculated the figures of the 50 most active real estate markets in the nation. The AEI table, “Housing Price Appreciation (Month-Over-Month)”, shows the month-to-month changes from the beginning of 2019 to June of this year. Let’s start with national data. The market in general has been on such an unrelenting rampage for so long that only twice during that time have prices retreated and each time only by 0.1%. As of late January, US monthly HPA was 2.6%, slipping to a still robust 1.1% in May. But in June, the appreciation hit a virtual free fall, dropping to just 0.2%.
Behind that national downshift are incredible reversals in various cities that thrived just a few months ago. In June 2021, only four subways showed a drop in prices compared to May and last year the only loser from May to June was Louisville with a miniscule -0.1%. In April, none of the fifty subways experienced a drop compared to March. But this June, no fewer than 21 locations experienced May price drops, some of them huge. In general, the steepest falls have occurred in expensive West Coast markets, as well as western subways which have gained legions of shoppers since the California exodus. Eleven of the most affected addresses fall into this category. The biggest loser was San Francisco with -3.8%, followed by San Jose (-3.2%). Other western cities that are experiencing steep declines include Seattle (-1.8%), Los Angeles (-1.5%), Portland (-1.3%), Denver (-0.9%) and Phoenix ( -0.6%). Most of these subways were swinging through February, with San Francisco up 2.8% from January, San Jose up 3.9% and Seattle up 3.5%.
“The clearest trend is retreat in these West Coast cities and those affected by the California madness,” says Pinto. In these places, the giant price increase of the past two years, from already high levels, has reduced affordability so much that the rapidly shrinking buyer ranks are hammering the values despite historically low volumes of homes for sale. From the fourth quarter of 2019 to the first quarter of this year, prices jumped from $ 1.2 to $ 1.6 million in San Joe, $ 575,000 to $ 819,000 in Seattle, from $ 466 to $ 623,000 in Denver, and from $ 340,000 to $ 516,000 in Phoenix. The only Western markets that still showed strength were Las Vegas, a venue that is cooling but still recorded a 0.2% increase from May, and Boise, where prices rose 1.8%, maintaining a record of steady month-over-month increases. Boise continues to thrive as a favorite destination for refugees working from home from California who can sell a home in, say, San Jose, get a much larger abode for half the cost in their adoptive city, and still deposit hundreds of thousands. dollars.
In recent months, the hottest markets have clustered in the sunshine state. Cape Coral, which recorded year-over-year increases in the mid-range of 30%, is backtracking quickly (you can read my recent article on the Cape Coral market here). Its 2.8% gain from April to May reversed to a negative 1.0% in June. Tampa, North Port, Orlando, Jacksonville and Miami are all down from their February increases, but are still up between 0.2% and 1.1%.
Conversely, a number of older metros that have not experienced large price increases have demonstrated remarkable resilience, for one simple reason: many remain relatively cheap. St. Louis, Nashville, Boston, Providence, Philadelphia, Kansas City, Columbus and New York all ranked in the top ten for May-June earnings. Tied for first place with Boise the Big Apple, which achieved a month-over-month increase of 1.8% and is one of the few supporters to appear on an upward trajectory.
The June downdraft radically transforms the outlook for this year and 2023
Pinto also gets a good look at where prices are headed by studying Optimal Blue’s “fare lock” data. These numbers reflect the prices of contracts for sales that will close in approximately 90 days. For Pinto, the rate freeze trend points to falling prices nationwide from July to December 2022. “We expect the domestic HPA month-over-month to turn negative in July for the first time in years,” he says. “From there, prices are expected to drop 3% to 5% from June levels by the end of the year. These total increases will gradually accumulate over the seven months from June to December. “By the end of the year, Pinto predicts that home prices will still be 4% to 6% above December 2021, but will likely stay on track. descending.
Pinto predicts that if overall prices drop by around 4% between now and the end of the year, far more subways than the negative 21 in June will soon post prices that are falling from month to month. “I wouldn’t be surprised if a few months ago we saw 40 cities in decline,” he says.
So where does Pinto see values heading in 2023? It would appear that if prices fell in December, they would continue to plummet for most of 2023. But that’s not necessarily the most likely scenario, says Pinto. “In the past few weeks, we have seen mortgage rates fall from 6% to around 5.5%,” says Pinto. “If rates continue to decline, that would boost appreciation.” He points out that although stocks are growing, stocks remain extremely scarce. “We are still about a month of supply at the current level of demand,” he says. “To get prices down, we would need to see seven ‘months of supply’, and that could be a long way off.” For Pinto, it is highly possible that a combination of stable or falling rates and limited volumes of homes for sale could sustain earnings of 4% to 6% next year.
However, Pinto says it has never been so difficult to predict the future of housing. “There are so many factors that push and pull in different directions,” he says. “My crystal ball is getting foggier.” The new monthly numbers of the AEI allow homeowners to follow the market trend, not just over long periods, but as it evolves. People are extremely anxious to know what today’s tumultuous times mean for the future of their greatest asset. They want to see if the value of their colonial ranch has increased or decreased in the past 30 days. Now they can. AEI numbers don’t give homeowners a crystal ball. But following the new AEI data will keep the thumb on the pulse of the market that, for most Americans, matters more than everyone else.