Rising Home Prices Surge Amid Supply Constraints and High Rates
In May, home prices reached a new all-time high, registering a 0.7% national increase compared to April, according to the Black Knight Home Price Index.
Since January, prices have continued to rise, with a 0.1% increase in May compared to the previous year.
Although a surge in mortgage interest rates dampened the heated housing market last year, its impact was short-lived. Despite interest rates remaining high, home prices are once again climbing, and the rate of growth is accelerating month after month.
Andy Walden, the Vice President of Enterprise Research at Black Knight, stated, “There is no doubt that the housing market has reignited from a home price perspective.” He added, “May’s exceptionally strong month-over-month gain of +0.7% would equate to an annualized growth rate of 8.9%, suggesting that the annual home price growth rate would rapidly increase in the coming months.”
Home prices began to decline last summer due to a significant rise in the average interest rate on the 30-year fixed-rate mortgage within a short span of six months. However, prices started to rebound in January when buyer demand surged against limited inventory. It is possible that buyers have grown accustomed to higher rates. Robert Reffkin, the CEO of Compass Real Estate, commented on CNBC’s “Squawk on the Street”: “Earlier this year, I shared that I believed 6% mortgage rates were accepted as the new normal. I think now we’re in an environment where 7% mortgage rates are now the new normal, and people are accepting it.”
By May, over half of the largest 50 housing markets in the nation, primarily in the Midwest and Northeast, had either exceeded their previous price peaks or achieved new highs.
Though home prices are still relatively weaker in the West and in many cities that experienced a pandemic-driven housing boom, signs of stabilization are emerging. San Jose, California, experienced a 10% decline in home values last year but is now witnessing a decrease in inventory and a revitalization of prices. In May, San Jose saw a 1.4% month-to-month price increase, making it the second largest gain on a seasonally adjusted basis. San Diego, Los Angeles, San Francisco, and Seattle also reported price growth in May.
Overall, the housing market is experiencing a strong resurgence in home prices, with optimistic projections for continued growth in the near future.
Austin, Texas stands as the one exception, emerging as one of the largest boom towns during the pandemic.
“Inventory there still continues above pre-pandemic levels, exerting downward pressure on prices, resulting in a significant -13.8% gap below peak values. This market displays the most substantial discrepancy among all others, with only eight out of the top 50 markets currently below their 2022 peaks,” stated Walden.
On the whole, however, the supply is dwindling once again. New listings have dropped by approximately 25% compared to last year. Homeowners, benefiting from mortgage rates below 4%, express reluctance in selling as they would potentially have to pay significantly higher interest rates to secure another property. Overall, the total inventory stands at roughly half of what it was before the pandemic, which triggered a substantial housing boom.
Nonetheless, sales of pre-owned homes remain weaker than those of a year ago, mainly due to a decrease in supply rather than an increase in costs. According to the National Association of Realtors, the median price of a pre-owned home in May reached $396,100. In a recent report, Redfin—a real estate brokerage agency—revealed that the average home now sells slightly above its listed price for the first time in almost a year.
Bidding wars have resurfaced, albeit at the expense of affordability. As of June 22, with 30-year rates at 6.67%, a median-priced home with a 20% down payment and a 30-year mortgage required $2,258 per month in principal and interest payments—a record-high amount slightly exceeding the $2,234 payment required back in October, according to Black Knight.
