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Home prices in US cities, particularly in the west, are cooling as rising mortgage rates have shrunk the pool of property shoppers.
In April, annual growth in US prices peaked at 21 per cent, according to property company Zillow’s home value index. By last month, that had fallen to 14 per cent. Prices in the US residential property market are resetting, says Zillow senior economist Jeff Tucker, “but it’s too soon to tell how big a price reset it will be”.
In July, the S&P Case-Shiller index, which measures house prices in 20 US cities, recorded its first monthly decline in a decade, dropping by 0.44 per cent. In August, the median house price in the US was $356,054 according to Zillow, only about $1,500 down from its all-time high in June.
“The fact of prices declining rather than rising is a watershed moment,” Tucker says. “We really haven’t seen anything like this since 2010 or 2011. [ . . . ] This summer marked the end of that long bull run for home value appreciation in the US.”
Mortgage guarantor Freddie Mac reported that, as of October 6, the average 30-year, fixed-rate mortgage fell to 6.66 per cent, down from 6.70 per cent a week earlier. But a year earlier the rate sat at 2.99 per cent. Mortgage rates have risen quickly this year as the Federal Reserve halted its pandemic-era programme of purchasing mortgage-backed securities and also raised interest rates to counter inflation.
The Mortgage Bankers Association reported on October 5 that mortgage applications had declined more than 14 per cent from the week before. Sales of existing homes in August were down 19 per cent year-on-year, according to the National Association of Realtors.
“It’s going . . . to be a rocky couple quarters for the industry,” says Andrew Vallejo, a real estate agent in Austin.
The rising rates are pushing home ownership beyond the reach of some buyers, cooling demand for homes. Buyers hit an “affordability ceiling” in April and May, Tucker says. The monthly mortgage payment on a typical home with a 20 per cent down payment jumped from $1,035 in August 2021 to $1,643 last month, a 59 per cent increase.
Buyers began to drop out of the housing market. At the same time, sellers continued to list their homes in the spring and summer, encouraged by the record prices commanded during the first two years of the pandemic. Home sales began to slow, and as properties sat on the market for longer, inventory — the number of homes available to purchase — began to build.
The longer they sat, the more pressure grew for homeowners to cut their list prices. According to the Case-Shiller index, July prices declined the most in San Francisco, at 3.5 per cent; Seattle at 3.1 per cent; and San Diego at 2.5 per cent.
The latest sales data represents offers made months ago, says Taylor Marr, deputy chief economist at Redfin estate agents, and properties that sit unsold do not appear in it at all. Eventually, those owners will accept a lower price, further depressing the US median sale price.
The cool-down is most acute in western states, though it is not limited to the region. Sixteen of the 100 US cities where asking prices declined the most are located in the west. The greatest impact has been felt in expensive markets such as Seattle, Washington state, or San Jose, California, where rising rates add the most to a monthly mortgage payment, or markets that heated most during the pandemic and thus have the farthest to fall — Austin, Texas; Boise, Idaho; and Phoenix, Arizona.
San Jose is one of the fastest cooling markets in the US, according to data from Zillow. Though the median home sale price was $1.4mn, about 25 per cent of listings in August had a price cut, compared with 12 per cent in August 2021. Meanwhile, homes sat on the market longer: the number listed for less than two weeks fell about 5 per cent.
Some affluent buyers employed at tech companies dropped out of the market this year because the stock market downturn lowered the value of the shares they planned to sell for a down payment, says San Jose real estate agent Tung Nguyen.
Zillow’s data shows that year-over-year price growth in San Jose shrank to 2 per cent in August, down from a high of 26 per cent in February. Prices have dropped as sellers grow “more realistic”, Nguyen says. He notes that one condo seller he represented went under contract in March at his asking price of $608,000, but the deal unravelled two months later when the buyer’s stock portfolio plunged. The condo fetched $41,000 less when it sold last month.
Junior Torres, a real estate agent 840 miles north in another tech hub, Seattle, says he too has seen deals fall apart for the same reason. Homes in good shape continue to sell within seven to 10 days, but less attractive listings have required “substantial price adjustments”.
The Bay Area market has picked up some since mid-August, says real estate agent Manu Changotra. Multiple offers are returning, but “nobody is paying $100,000 over [asking price] anymore”.
“The market is shifting, but a correction was needed,” she adds. “It was not a very sane market, what we were having in the pandemic.”
Sellers, who have driven the market since the pandemic’s onset in 2020, are waking up to the fresh reality. Fewer properties are receiving multiple offers, and more sellers are cutting their initial listing price. Austin was one such seller’s market. Zillow’s data shows that year-over-year growth in Austin’s home values peaked in January at 47 per cent, before falling to 7 per cent in August.
Austin real estate agent Katie Dochen recalled the difficulty of persuading an owner to cut the price of a home that sat on the market longer than expected. “For a few months there, pricing a house was like trying to hit a moving target,” she says.
But the slowdown also allowed longtime Austinites Stephen and Ashley Aarons to buy their first home. With three children and a fourth on the way, they wanted a larger place, but their efforts to save were stymied by the market’s ballooning prices. Finally, they switched their target neighbourhood, and this month closed on a five-bedroom house with a pool for $1.5mn — below asking price. “It was a very emotional rollercoaster ride,” Ashley says.
Zillow’s housing economist says several acquaintances have asked eagerly if the housing market is “crashing”, hoping that a price decrease might allow them to buy property for the first time.
“The wind has changed,” Tucker says. “Very quickly, that weather vane has swung around from being arguably the best sellers’ market in history . . . to now being certainly more balanced and maybe, arguably, a buyers’ market in much of the country.”
The median stay in a US home is 12 years, Marr says. That means while investors and home flippers may feel a price crunch, most homeowners will not. Instead, they will simply not sell for as much as they could have.
Homeowners “are incentivised to stay put” right now, he adds. If the property market is like a game of musical chairs, “the rise in interest rates is turning down the music, and that just results in more people saying: ‘I have a good chair. Why would I leave?’” In fact, August listings dipped “substantially”, Tucker says. That could result in fewer homes on the market, diminishing the downward pressure on prices.
That back-and-forth is the essence of supply and demand and “should help to find that new equilibrium price”.
For now, in Sacramento and the surrounding counties, there is less a price adjustment than an attitude adjustment, says estate agent Bruce Reddick. Sacramento is one of the fastest-cooling markets in the country, according to Redfin’s data, with more than half of sellers cutting their asking price in July, compared with about a third in July 2021. For now, Reddick has a more upbeat take, saying it means a home in a less desirable neighbourhood might sit on the market for “two weekends instead of one” or that a buyer refuses to waive protective contingencies.
The tilt toward a buyers’ market has favoured two of his customers. Brent Burky and Christine Burky-Mellon sat out the pandemic housing rush, deterred by the competitive process and escalating prices. But concerned by rising interest rates and bolstered by family funds, they started to search this summer.
They found a three-bedroom house built in 1950 and negotiated $20,000 off the asking price to close at $720,000.
Though thrilled to soon have a backyard big enough for a garden, they are cutting expenses in anticipation of shouldering a mortgage payment driven higher than expected by interest rates.
Brent says that until the couple adjusts to their new monthly outflow, “every subscription is coming under scrutiny right now”.
Claire Bushey is the FT’s Chicago correspondent
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