Potential Decrease in Home Prices Imminent
The recent trend in home prices indicates a possible reversal, following a continuous rise since January. Black Knight’s latest data reveals that home prices reached an all-time high in July, surging by 2.3% compared to the same period last year. This increase surpasses the approximately 1% gain witnessed in June, and it is anticipated that the year-over-year comparison for August will show an even larger growth due to the substantial price declines experienced last August.
Despite the overall upward momentum, prices showed signs of weakness on a monthly basis, falling below their 25-year average, although they typically witness gains during this time of year. This decline in monthly gains follows a period from February through June where prices significantly outperformed historical averages. These observations potentially indicate that a slowdown in prices is underway once again.
Black Knight’s vice president of enterprise research, Andy Walden, highlighted the decreased monthly gains, as well as the lower average purchase prices and seasonally adjusted price per square foot among recent sales, based on the rate lock and sales transaction data. Walden emphasized the importance of focusing on seasonally adjusted month-over-month movements rather than solely relying on traditional annual home price growth rates.
The primary factor contributing to this cooling off in prices is the rise in mortgage rates. After experiencing a substantial increase last summer and fall, causing prices to decline, rates declined throughout most of the winter and part of the spring, subsequently driving home prices higher. Currently, rates have surpassed 7%, reaching more than 20-year highs in August.
Additionally, new listings saw an increase from July to August, which is atypical for this period. Some sellers may be capitalizing on historically high prices. However, active inventory remains nearly 48% lower compared to levels witnessed between 2017 and 2019. Realtor.com’s chief economist, Danielle Hale, acknowledged the positive aspect of the rise in new listings for home shoppers but also noted that inventory remains persistently low, despite record-high mortgage rates dampening demand.
Although a decline in prices would offer some relief to buyers, it is unlikely to be sufficient. The substantial surge in home prices since the beginning of the Covid-19 pandemic, combined with significantly higher mortgage rates, has severely impacted affordability. According to Black Knight, the median household income now requires approximately 38% to cover the monthly payment on a median-priced home purchase, marking the lowest affordability level since 1984.