What’s happening with home prices as mortgage rates fall

Phillippe Lord, CEO of Meritage Homes, on the housing market

An aerial view from a drone shows homes in a neighborhood January 26, 2021 in Miramar, Florida. Existing home prices rose to their highest level in 6 years, according to two separate indexes.

Joe Raedle | Getty Images

The US housing market cooled off quite dramatically last year after mortgage rates more than doubled from historic lows. However, property prices have been stickier.

Prices started falling last June but are still higher than a year ago. Prices are pushing back now that demand seems to be coming back to the market due to a slight drop in mortgage rates.

According to CoreLogic, U.S. home prices were up 6.9% year-on-year in December, the latest reading. That was the lowest annual rate of appreciation since late summer 2020. Last April, the annual rate of appreciation peaked at 20%.

Falling house prices reflected weaker house demand as inflation, job cuts and economic uncertainty weighed on the barrier erected by higher mortgage rates. But mortgage rates began falling in December, and prices responded immediately. The cooling continued, but not as severely as in previous months.

“While prices have continued to fall since November, the rate of decline has been slower than the summer and still amounts to a cumulative price decline of just 3% since last spring’s peak,” said Selma Hepp, chief economist at CoreLogic.

Hepp notes that some of the fringes that became popular in the early years of the pandemic and saw sharp price increases are now experiencing major corrections. But she doesn’t expect it to last long.

“While the price decline is likely to continue into spring 2023, when the market is likely to see some year-on-year declines, the recent fall in mortgage rates has stimulated buyer demand and could lead to a more optimistic home buying season than many expected. ‘ said Heppe.

A monthly Fannie Mae survey of homebuyer sentiment showed an increase in January for the third straight month. Consumers surveyed said they still expect prices to fall or level off over the next year, but the proportion who think it’s a good time to sell a home rose from 51% to 59%.

Market surge in spring?

More inventory in the market would help bring more buyers back to the market. Anecdotally, real estate agents are reporting an earlier surge in the spring market, with open houses seeing more foot traffic in recent weeks. Some also reported the return of bidding wars.

The country’s house builders are also reporting increased demand. Sentiment among home builders rose in January for the first time in 12 months, the National Association of Home Builders said. Builders reported increases in current sales, buyer traffic and sales expectations over the next six months. Lower mortgage rates are driving new demand.

“As mortgage rates continue to fall later this year, affordability conditions are likely to improve and this will increase demand and bring more buyers back into the market,” said NAHB chief economist Robert Dietz.

NAHB’s home affordability index started this year at its lowest level since the metric began being tracked a decade ago. But lower rates are starting to reverse that.

If home prices continue to fall at the average rate over the past six months, annual home price growth could finally turn negative sometime within the next three months, according to a new report by Black Knight. It now costs almost $600 (+41%) more to make the monthly mortgage payment on an average-priced home when using a 30-year mortgage that’s 20% lower than it did at the same time last year.

Mortgage applications for home purchases, the most recent indicator of demand, rose in January and the first week of February, although they are still lower than the same period a year ago, when interest rates were almost half what they are now.

“We can see strong signs of a January pick-up in lending at lower interest rates and slightly lower home prices,” said Ben Graboske, president of Black Knight Data and Analytics. “But affordability still has a stranglehold on much of the market.”

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