Housing prices decelerated at the end of 2022 as high mortgage rates hurt affordability, a sign of a major turnaround in the market that would have significant consequences for the economy overall.
Prices rose 5.8% on the year in December, slower growth from the month before, when prices were up 7.6%, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index. That 1.8 percentage point deceleration is notable for the index, which has been used as a gauge since 1987.
Home prices were down 4.4% from their peak in June.
“Prices have softened quickly, declining on a sustained basis in recent months," said Rubeela Farooqi, chief U.S. economist at High-Frequency Economics. "An easing of prices pressures should be a positive for home sales. However, borrowing costs remain high and have weighed heavily on demand and affordability, which could continue to be a hurdle for buyers in the near term."
The down-throttling of prices comes as the Federal Reserve continues to hike its interest rate target aggressively in an attempt to slow demand in response to stickier-than-anticipated inflation. Housing is perhaps the sector most responsive to interest rate hikes, as mortgages rise in tandem.
MEDIAN PRICE FOR NEW HOME SALES FALLS FOR FIRST TIME SINCE PANDEMIC
Mortgage rates have been on the rise since the central bank began tightening and punched in at their highest level since 2001 in November and December but dipped slightly at the start of the year.
As of Tuesday, the average rate on a 30-year fixed-rate mortgage was 6.5%, according to Freddie Mac, up more than 3 percentage points from the year before. The rate on an average 15-year fixed-rate mortgage was 5.76%.
Last week, it was announced that the median price for a new home in January was lower than it was a year ago, marking the first annual decline since the pandemic. The median sales price for a new home was $427,500 in January, a decrease from the month before — and 0.7% lower than in January 2022. That marks the first such annual decrease since August 2020.
New home sales in January increased from the month before, rising 7.2% last month to a seasonally adjusted annual rate of 670,000, according to a report Friday from the Census Bureau.
Most economists expect the price deceleration trend in the housing market to have some staying power.
“House price indices will likely continue to fall through the end of this year, but this housing correction will be milder and shorter-lived than the housing downturn that made the Great Recession so severe,” said Bill Adams, chief economist for Comerica Bank. “Over time, the cooler housing market will show up in slower increases in shelter costs in the CPI and PCE inflation gauges, which will likely help to persuade the Fed to end interest rate hikes in mid-2023 and begin to reduce interest rates in 2024.”
Housing prices in overheated markets, primarily on the West Coast, are set to get crushed this year, according to a report released by researchers from Goldman Sachs last month. The researchers predict that housing prices in Austin will fall by more than 15% this year alone. Likewise, Phoenix, Denver, and Seattle will see home prices dropping more than 10% this year and falling in 2024, as will the California cities of San Diego and San Francisco, the report reads.
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It is widely believed that the housing market is in a recession right now, although some expect the broader economy to fall into a recession in the coming months as the Fed hikes interest rates.
A survey conducted by the National Association for Business Economics and released Monday found that 58% of leading business economists predict a recession coming in the next 12 months.
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