ReportWire

Tag: falling home prices

  • Interactive map: The home price correction (or lack of correction) in America’s 400 largest housing markets

    Interactive map: The home price correction (or lack of correction) in America’s 400 largest housing markets

    Across the country, mortgage brokers and builders are scrambling as millions of potential buyers sit on the sidelines after last year’s historic mortgage rate shock. The numbers aren’t pretty: On a year-over-year basis, mortgage purchase applications are down 36.4% and existing home sales have fallen 35.4%.

    While home transactions went into free fall in the second half of 2022, home prices have felt less of an impact. Through October, seasonally adjusted U.S. home prices were down just 2.4%, as measured by the Case-Shiller National Home Price Index. On one hand, that marks the second biggest home price correction of the post-WWII era. On the other hand, it’s mild compared to the 26% peak-to-trough U.S. home price crash from 2007 to 2012.

    In the future, Moody’s Analytics chief economist Mark Zandi expects the story to begin to change: The free-fall in home sales will soon bottom out, while the home price correction will carry on.

    “Housing demand (home sales) is close to a trough, housing supply (housing starts and completions) has yet to hit bottom, and house prices have a way to go before reaching their nadir,” Zandi tells Fortune.

    By the time U.S. home prices bottom out, Zandi expects them to be 10% below the 2022 peak. He isn’t the only economist who thinks home prices will continue to fall: Among the 24 major housing forecasters tracked by Fortune, 17 predict that U.S. home prices will decline further in 2023. (Another seven firms think U.S. home prices will remain flat or rise by a low single-digit amount in 2023).

    “The housing market downturn, triggered by rapid increases in mortgage borrowing costs, continues to cause us significant concern. Prices have risen hugely over the past couple of years as demand vastly outstripped limited supply of homes, but this process is going into sharp reverse,” writes James Knightley, chief international economist at ING. His firm expects around a 10% peak-to-trough decline in U.S. home prices.

    Keep in mind, when a group like ING or Moody’s says U.S. home prices, they’re talking about a national aggregate. Whatever comes next will likely vary significantly by market. After all, there’s a reason industry types like to say real estate is local.

    To better understand the regional home price story, Fortune reviewed the Zillow Home Value Index (ZHVI) for November 2022.*

    Through November, home values in 254 of the country’s 400 biggest housing markets were below their 2022 peak. In those markets, the average decline was 2.1%.

    “Home values slipped 0.2% in November, resuming a slow decline that began this summer. Once again, the proximate cause could be traced to high mortgage rates,” writes Zillow researchers. “While national prices only inched down, they slumped more dramatically in many formerly-hot housing markets.”

    The markets hit the hardest by the correction fall into one of two groups.

    The first group are boomtowns, often second-home markets or up-and-coming cities, where remote workers moved during the pandemic and pushed local home prices beyond what local incomes could support. That “froth” might explain why home prices are falling more swiftly in boomtown markets like Coeur d’Alene, Idaho (where home values are down 10.8% from the peak); Austin (down 10.4%); Phoenix (down 8.1%); Las Vegas (down 8%); Salt Lake City (down 7.9%); and Reno (down 7.6%).

    The second group comprises high-cost markets along the West Coast, including places like San Jose (where home values are down 10.6% from the peak); San Francisco (down 9.5%); Santa Cruz, Calif. (down 8.4%); and Seattle (down 5.8%). Historically speaking, those high-end markets are vulnerable whenever the stock market slips into bear territory or mortgage rates spike. Of course, both red flags occurred in 2022.

    While home prices in 254 major markets are below their 2022 peaks, another 146 major markets remain at their 2022 peaks. The ongoing mortgage rate shock has yet to cause home values, as measured by Zillow, to fall in markets like Indianapolis, Miami, and Philadelphia.

    So therefore the coast is clear in markets like Miami and Philadelphia, right? Not so fast, says Moody’s.

    While the home price correction has yet to impact tight inventory markets like Miami and Philadelphia, it still could this year. Moody’s expects home prices to fall further this year in every major regional housing market. In cities like Miami and Philadelphia, Moody’s expects that peak-to-trough decline to hit 16.9% and 5.3%, respectively. (Here is Moody’s outlook for the nation’s 322 largest markets.)

    While the ongoing housing downturn has translated into the U.S. housing market flipping from inflation-mode to deflation-mode, it has only barely touched the gains accrued during the Pandemic Housing Boom. As of October 2022, U.S. home prices were still 38.1% above March 2020 levels.

    Even in the housing markets hit the hardest by the correction, including San Francisco (down 9.5% from its 2022 peak) and Austin (down 10.4% from its 2022 peak), prices remain well above pre-pandemic levels. Indeed, as of October, home values in San Francisco were 16.9% above pre-pandemic levels while those in Austin were up 57.1%.

    *Note: The Zillow Home Value Index (ZHVI) is a measurement of the typical home value in a given region. According to Zillow, the index “reflects the typical value for homes in the 35th to 65th percentile range.” Fortune pulled ZHVI’s “raw version” which is not seasonally adjusted.

    Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.

    Our new weekly Impact Report newsletter examines how ESG news and trends are shaping the roles and responsibilities of today’s executives. Subscribe here.

    Lance Lambert

    Source link

  • These 49 housing markets to see home prices fall over 15%—this interactive map shows Moody’s updated forecast for 322 markets

    These 49 housing markets to see home prices fall over 15%—this interactive map shows Moody’s updated forecast for 322 markets

    A historic mortgage rate shock—with the average 30-year fixed mortgage rate jumping from 3% to 6% this year—following the Pandemic Housing Boom’s 41.3% run-up in U.S. home prices in just over two years has simply pushed many would-be buyers to their breaking point. Other borrowers, who must meet lenders’ strict debt-to-income ratios, have lost mortgage eligibility altogether. That historic squeeze, which comes from prices and rates, is what Fortune calls “pressurized affordability.”

    Already, pressurized affordability has seen U.S. home prices, as measured by the Case-Shiller National Home Price Index, fall for the first time on a seasonal adjusted basis since 2012. In total, U.S. home prices fell 2.2% between June 2022 and September 2022. That ties the second biggest home price correction of the post-World War II era.

    Whenever a publication like Fortune says “U.S. homes prices,” we’re talking about a national aggregate. Whatever comes next in the U.S. housing market will surely vary by market, price point, and home-type.

    To get an idea of what might come next, Fortune once again reached out to Moody’s Analytics to get their updated home price forecast (see map below) for 322 of the nation’s largest housing markets. (Here’s their previous metro-by-metro forecast).

    Here’s what the data says.

    Back in May, Moody’s Analytics chief economist Mark Zandi told Fortune that the Federal Reserve’s inflation fight would see the U.S. housing market slip into a “housing correction.” At the time, he expected home prices to flatline nationally and fall between 5% to 10% in “significantly overvalued” markets.

    Zandi, of course, was right about the housing correction. That correction has actually been so sharp that Moody’s Analytics in October once again lowered its national home price outlook. Peak-to-trough, Zandi expects U.S. home prices to fall 10%. If a recession does manifest, that outlook shifts down to a 20% peak-to-trough decline.

    “No change in our outlook for [national] house prices or the mortgage rate. I am feeling more confident that the economy will be able to avoid a full-blown recession next year, which is consistent with the 10% peak-to-trough decline in national house prices,” Zandi told Fortune on Friday. Through spring 2023, he expects mortgage rates to hover around 6.5%.

    While Zandi expects around a 10% peak-to-trough home price decline nationally, he expects it to vary regionally. In markets like Morristown, Tenn. and Muskegon, Mich., Moody’s Analytics predicts home prices to fall 24.1% and 23.3%, respectively. The firm expects markets like New York and Chicago to fall by 6.3% and 4.2% from peak-to-trough.

    Heading forward, Moody’s Analytics expects “significantly overvalued” housing markets to see the sharpest declines. (You can find Moody’s market-by-market overvaluation study here).

    Look no further than markets like Boise and Flagstaff, Ariz. Just weeks into the pandemic, those markets got flooded with buyer interest from white-collar professionals working in high-cost cities like Seattle and San Francisco. While remote work was a game changer for those uprooted white-collar workers, it didn’t fundamentally change local incomes. So as the boom raged on, Boise and Flagstaff became “overvalued” by 76.9% and 65.6%.

    Fast-forward to 2022, and decelerating levels of migration means those boomtowns must rely more on local incomes. That’ll be hard to do, Zandi says. And for that reason, Moody’s forecast model expects home prices in markets like Boise and Flagstaff to drop over 20% from peak-to-trough.

    While speaking at a Brookings Institute event on Tuesday, Fed Chair Jerome Powell said the run-up in home prices during the Pandemic Housing Boom qualifies a “housing bubble.”

    “Coming out of the pandemic, [mortgage] rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID. So you really had a housing bubble, you had housing prices going up [at] very unsustainable levels and overheating and that kind of thing,” Powell said. “So, now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand.”

    The Pandemic Housing Boom did indeed see housing fundamentals get out-of-whack. According to Moody’s Analytics, the average U.S. housing market was “overvalued” by 1% in the second quarter of 2019. Through the second quarter of 2022, the average U.S. housing market was “overvalued” around 25%.

    Heading forward, Zandi doesn’t expect a 2008-style financial crisis or foreclosure crisis, but he does expect housing fundamentals to pull back towards the mean. Some of that moderation will come through rising incomes, some of it will come through falling home prices.

    “Before [home] prices began to decline, we were overvalued [nationally] by around 25%. Now this means [home] prices will normalize. Affordability will be restored. The [housing] market won’t be overvalued after this process is over,” Zandi says. “It’s all about affordability. First-time buyers are locked out of the market. They simply can’t afford mortgage payments. Trade-up buyers won’t sell and buy because it doesn’t make any economic sense.”

    Of course, the home price correction has already arrived.

    Just over half of the country’s 400 biggest housing markets have seen local home values, as measured by Zillow, fall off their 2022 peak. The average decline being -2%.

    The ongoing correction has hit two different types of markets the hardest: high-cost West Coast markets, and “bubbly” boomtowns.

    Even before the correction got into full-swing, John Burns Real Estate Consulting told Fortune that high-cost West Coast markets were at higher risk of declining values. The reason being they’re simply more rate sensitive. Markets like Seattle (down 6.3%) and Portland, Ore. (down 5.1%) are hit by a double whammy: Not only are their high-end real estate markets more rate-sensitive, but so are their tech sectors. There’s also the fact that homebuilders and iBuyers—who are more likely to price down during a correction—make up a higher concentration of inventory out West.

    The other group of markets who’ve been hit hard by the correction are bubbly markets. These markets, which includes places like Austin (down 10.2%) and Boise (down 7.1%), saw their home values get detached from underlying fundamentals (i.e. local incomes) during the boom. And now, they’re seeing sharper pullbacks.

    Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.

    Our new weekly Impact Report newsletter will examine how ESG news and trends are shaping the roles and responsibilities of today’s executives—and how they can best navigate those challenges. Subscribe here.

    Lance Lambert

    Source link

  • The U.S. housing market to see second biggest correction of the post-WWII era—when to expect the home price bottom

    The U.S. housing market to see second biggest correction of the post-WWII era—when to expect the home price bottom

    Homebuilders and economists alike saw the 2000s housing bubble brewing—they just didn’t think it would burst. Their reasoning being, that at the time, home prices hadn’t really fallen since the Great Depression era.

    “I think that the religion people had from 1946 to 2008, that housing prices always go up, is dead. My parents believed that it was literally inconceivable for [home] prices to go down,” Redfin CEO Glenn Kelman tells Fortune.

    That “religion” of course came crashing down after the bursting housing bubble caused U.S. home prices to fall a staggering 27% from 2006 to 2012. Knowing that home prices can indeed fall, Kelman says, is why builders and flippers started cutting prices faster this time around. Once the market shifted, they wanted to get out first.

    “Folks [are] responding [in 2022] to that with almost PTSD, and they pull back much more quickly,” Kelman says.

    As of August, the lagged Case-Shiller Index showed that U.S. home prices had fallen 1.3% from their June 2022 peak. That marks the first decline since 2012. It’s also likely well below the actual drop. Just look at the 7.6% decline in third quarter U.S. home equity, as reported on Friday by Black Knight. That’s the biggest home equity drop ($1.3 trillion) ever recorded, and the biggest percentage drop since 2009.

    Just how far will home prices fall? It depends on who you ask.

    Researchers at Goldman Sachs expect U.S. home prices to decline between 5% to 10% from peak-to-trough—with their official forecast model predicting a 7.6% drop. If it comes to fruition, it’d surpass the 2.2% decline between May 1990 and April 1991. That would make this ongoing correction the second biggest home price decline of the post-World War II era.

    “Economists at Goldman Sachs Research say there are risks that housing markets could decline more than their model suggests…based on signals from home price momentum and housing affordability,” writes Goldman Sachs on its website.

    That said, it could take a while for home prices to reach the bottom. In fact, the Goldman Sachs model estimates U.S. home prices won’t get to that point until March 2024.

    Researchers at Moody’s Analytics are a bit more bearish.

    It forecasts a 10% peak-to-trough U.S. home price decline, with prices bottoming out in late 2025. However, if a recession hits, Moody’s Analytics would expect a bigger 15% to 20% peak-to-trough decline.

    Of course, when groups say “U.S. house prices,” they’re talking about a national aggregate. Regionally, researchers acknowledge that shifts in home prices vary significantly by market. In bubbly markets like Boise and Nashville, Moody’s forecasts a decline of around 20%. Meanwhile in Chicago, a relatively tame market during the boom, it expects a home price decline of less than 3.6%. (You can find their forecast for 322 markets here).

    Why are home prices already starting to roll over? It boils down to what Fortune calls pressurized affordability. Spiked mortgage rates coupled with a historic 43% jump in U.S. home prices during the Pandemic Housing Boom has simply put monthly payments beyond what many would-be borrowers can afford.

    When it’s all said and done, Moody’s Analytics chief economist Mark Zandi thinks this ongoing housing correction will push national housing fundamentals back in line with historic norms.

    “Before prices began to decline, we were overvalued [nationally] by around 25%. Now, this means prices will normalize. Affordability will be restored. The [housing] market won’t be overvalued after this process is over,” Zandi says.

    Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.

    Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.

    Lance Lambert

    Source link

  • The Fed’s housing market ‘reset’ isn’t letting up anytime soon—5 things to know heading into 2023

    The Fed’s housing market ‘reset’ isn’t letting up anytime soon—5 things to know heading into 2023

    “We have a ways to go, we have ground to cover with interest rates before we get to that level of interest rates that is sufficiently restrictive…we will stay the course until the job is done,” Powell told reporters after unveiling the Fed’s fourth consecutive three-quarter point hike in the Federal Funds rate.

    That’s not exactly what builders and mortgage brokers were hoping to hear.

    On one hand, this latest hike shouldn’t send mortgage rates—which financial markets price ahead of anticipated shifts in financial conditions—spiking. On the other hand, this additional rate hike also means financial markets aren’t about to send mortgage rates plunging.

    During the presser, Powell acknowledged that continued quantitative tightening means more pain still awaits the U.S. housing market.

    “Housing is significantly affected by these higher rates,” Powell told reporters. “The housing market needs to get back into a balance between supply and demand. We’re well aware of what’s going on there.”

    What exactly does that mean?

    To get a better idea of where the housing market downturn might head in 2023, let’s take a deeper dive into recent Fed commentary. Here’s the five big takeaways.

    1. The Fed’s housing market “reset” has pushed us into a “difficult [housing] correction”

    In June, Powell told reporters that the U.S. housing market needed to be “reset.”

    “We saw [home] prices moving up very, very strongly for the last couple of years. So that changes now…I’d say if you are a homebuyer, somebody or a young person looking to buy a home, you need a bit of a reset. We need to get back to a place where supply and demand are back together and where inflation is down low again, and mortgage rates are low again,” Powell told reporters this summer.

    At the time, Powell admitted he wasn’t sure how the “reset” would impact home prices. However, fast-forward to the September meeting, and Powell acknowledged that the Fed’s policy moves had pushed the U.S. housing market into a “difficult correction.”

    According to Moody’s Analytics chief economist Mark Zandi, a housing correction is a period in which the U.S. housing market—which got priced to 3% mortgage rates—works toward equilibrium in the face of spiked rates. Unlike the stock market, housing corrections are felt most acutely through a sharp drop in home sales. That said, Zandi says this correction will also put downward pressure on home prices.

    2. U.S. home prices are falling for the first time since 2012—the Fed says it could turn into a “material” drop

    In June, Powell said he was “not sure” if spiked mortgage rates would translate into lower home prices. But on Wednesday, Powell said “in some parts of the country you’re [now] seeing house prices declining.”

    The data backs him up. The latest reading of the Case-Shiller National Home Price Index shows that U.S. home prices fell 1.3% between June and August. That’s the first decline nationally since 2012.

    “While this [housing] market correction could be fairly mild, I cannot dismiss the possibility of a much larger drop in demand and house prices before the market normalizes,” Fed Governor Christopher Waller told an audience at the University of Kentucky in October.

    Waller went on to say this could turn into a “material” home price decline.

    Just how big is a “material” correction? Waller didn’t elaborate.

    3. The pandemic’s demand boom is over

    Even as policymakers scrambled to save an economy with a double-digit jobless rate in the spring of 2020, the U.S. housing market was already moving into boom mode.

    That boom was set-off by a spike in housing demand. Wealthy urbanities wanted second homes to help them escape locked down cities. Remote workers realized they could finally move deeper in the burbs or take off for a more affordable market. Meanwhile, investors realized that a combination of home price appreciation and historically low mortgage rates meant they could make a killing in the housing market.

    “We show that the COVID-19 housing boom in the U.S. was driven by an increase in demand…Since new construction typically accounts for about 15% of supply, our estimates imply that new construction would have had to increase by roughly 300% to absorb the pandemic-era surge in demand,” wrote Fed researchers this summer.

    That’s all over now. In the face of soaring mortgage rates, that demand boom deflated. Second home purchases tanked. Flippers called timeout. And some would-be buyers got called back into the office.

    This historic demand pullback could help the housing market achieve Powell’s goal of “balance.” By temporarily sidelining buyers, the Fed can give inventory breathing room to adjust upwards.

    4. The U.S. mortgage backed securities market remains “broken”

    Anytime the Fed moves into inflation-fighting mode, mortgage rates rise.

    That said, the magnitude of the mortgage rate gains— rates jumped from 3.09% to 7.3% over the past year—has caught the industry off guard. Historically, mortgage rates trade around 1.75 percentage points above the 10-year Treasury yield (which is currently at 4%). That spread is around 3 percentage points right now. The reason? As the Fed backed off buying mortgage-backed securities, investors—who assume new borrowers will refinance in the future and thus reduce returns—weren’t eager to pick up the MBS securities.

    This divergence between Treasury yields and mortgage rates has some analysts claiming the “MBS market is broken.”

    While the Fed hasn’t publicly commented on the spread, Powell did say in June he expects mortgage rates to eventually fall. What could cause that? If the Fed successfully tames inflation, it could pull back on hikes. There’s also the chance that higher rates could push us into a recession, which would then prompt the Fed to lower rates.

    5. A “material” drop in home prices shouldn’t set off a 2008-like financial crisis

    Unlike the housing correction that started in 2006, Powell doesn’t expect the 2022 correction to trigger a financial collapse.

    “From a financial stability standpoint, we didn’t see in this cycle the kinds of poor underwriting credit that we saw before the Great Financial Crisis. Housing credit was much more carefully managed by the lenders. It’s a very different situation [in 2022], it doesn’t present potential, [well] it doesn’t appear to present financial stability issues. But we do understand that [housing] is where a very big effect of our policies is,” Powell said on Wednesday.

    Fed Governor Waller had a similar message back in October.

    “Despite the risk of a material correction in house prices, several factors help reduce my concern that such a correction would trigger a wave of mortgage defaults and potentially destabilize the financial system,” Waller told an audience at the University of Kentucky. “One is that because of relatively tight mortgage underwriting in the 2010s, the credit scores of mortgage borrowers today are generally higher than they were prior to that last housing correction. Also, the experience of the last correction taught us that most borrowers only default when they experience a negative shock to their incomes in addition to being underwater on their mortgage.”

    Want to stay updated on the housing correction? Follow me on Twitter at @NewsLambert.

    Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.

    Lance Lambert

    Source link

  • Updated: Odds of falling home prices in your local housing market, as told by one interactive map

    Updated: Odds of falling home prices in your local housing market, as told by one interactive map

    Unlike the stock market—which corrects through price shifts—housing corrections are historically felt the most acutely through declines in housing activity. That, of course, is why spiked mortgage rates are already translating into sharp declines in both existing and new home sales.

    That said, it’s increasingly clear that this housing correction won’t be felt through just a decline in housing activity. The housing correction is also putting downward pressure on home prices, with many markets having already slipped into a home price correction.

    To better understand where home prices might be headed, Fortune reached out to CoreLogic to see if the firm would provide us with its updated October assessment of the nation’s largest regional housing markets. To determine the likelihood of regional home prices dropping, CoreLogic assessed factors like income growth projections, unemployment forecasts, consumer confidence, debt-to-income ratios, affordability, mortgage rates, and inventory levels. Then CoreLogic put regional housing markets into one of five categories, grouped by the likelihood that home prices in that particular market will fall between August 2022 and August 2023. Here are the groupings the real estate research firm used for the October analysis:

    • Very high: Over 70% chance of a price dip
    • High: 50%–70% chance
    • Medium: 40%–50% chance
    • Low: 20%–40% chance
    • Very Low: 0%–20% chance

    Between August 2022 and August 2023, CoreLogic predicts national home prices are poised to rise another 3.2%. That said, CoreLogic’s forecast model estimates a huge swath of the country is at risk of falling home prices.

    Of the 392 regional housing markets that CoreLogic measured, zero markets currently have “very low” odds of falling home prices over the coming year. Another 18 housing markets are in the “low” group and 39 markets are in the “medium” group. Meanwhile, CoreLogic put 97 markets in the “high” camp and 238 markets in the “very high” odds camp.

    This October assessment finds 335 markets have a greater than 50% chance of notching a negative year-over-year reading (i.e. markets in either the “high” or “very high” risk groups) over the next 12 months. In August, only 125 markets had a greater than 50% chance of falling home prices. In July, there were 98 markets at risk. In June, 45 markets were at risk. In May, just 26 markets fell into those “high” or “very high” risk camps.

    The trajectory is clear: Falling home prices are getting more and more likely.

    There’s two main reasons CoreLogic’s outlook continues to go lower. 1. Housing data, which feeds into the forecast model, continues to weaken in the face of deteriorating housing affordability. 2. Home prices are already falling in many markets.

    “With some markets already posting month-to-month declines since this year’s peak in prices, probability of price decline on a year-over-year basis intensified as well in August,” Selma Hepp, deputy chief economist at CoreLogic, tells Fortune.

    Where are home prices falling the fastest? The biggest declines are occurring in West Coast, Southwest, and Mountain West markets.

    “Markets already posting monthly declines are generally concentrated in the West and Mountain West, particularly in Washington, Idaho, California, Utah, Colorado, Oregon, Montana, Nevada and Arizona, and have seen relatively larger run-up in prices since the onset of pandemic,” Hepp says.

    The sharpest home price corrections can be found in one of two groups. The first group are high-cost tech hubs like Seattle and San Jose. Not only are those high-end housing markets more rate sensitive, but so are their tech sectors. The second groups are frothy housing markets like Austin, Boise, and Phoenix. Those frothy markets—which saw home values go far beyond what local incomes can support during the Pandemic Housing Boom reach levels that local incomes are struggling to support.

    Hungry for more housing data? Follow me on Twitter at @NewsLambert.

    Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.

    Lance Lambert

    Source link