On August 22, the source with arguably the best residential real estate data in the industry, the American Enterprise Institute’s Housing Center, released new numbers for July. General theme of the update: America has reached a pivot point where the market has gone from record highs this spring to substantial real-time declines in a number of the most overheated metros. The key revelation is that from August through the end of 2022, prices domestically are following the first substantial pullback over a six-month period in over a decade. To get the estimate, and it may shock you, read on.
AEI’s July report highlights three key trends. The first highlights the damage that has suddenly engulfed the big, super-expensive Western markets. For the United States as a whole, month-over-month house price appreciation or HPA slowed sharply, from an average of 2.1% from January to April to just 0, 2% in June, followed by a slight increase to 0.5% in July. “The July increase may be seasonal,” says Housing Center director Ed Pinto. “A lot of homes that contract during the peak spring selling season close about 45 to 60 days later in July.” It is important to note that last April, everybody of the 60 markets, AEI metrics were ahead of March.
Trend 1: The West’s affordability problem is finally making itself felt
On the other hand, twenty metros fell in July. And of the seventeen that have fallen the most, ten are major Western cities that were already expensive when the take-off began in late 2020, and ranked among the early winners of the boom. The biggest loser was San Jose, down 3.9% after a 4.5% decline in June. Seattle fell 2.7%, Colorado Springs 1.8%, San Francisco 1.3% and Portland 1.2%, while Denver, Las Vegas, Los Angeles and San Diego all fell around 1%. Phoenix and Austin joined the retreat at -0.6% and -0.5% respectively. Seven metros mirrored San Jose by plunging in both June and July, a repeat that confirms the persistence of the slowdown in the western part. “The only western metros that have held up pretty well are Sacramento [+0.5%]Tuscany [+0.9%]and Riverside [+0.3%]“, explains Pinto. “And these are three of the smallest markets in the region.”
For Pinto, the impulse at the origin of this downward current is fundamental. “It doesn’t help that so many people from California and Seattle are moving to cheaper cities because of the work-from-home revolution,” Pinto told Fortune. “But this exodus has been happening for years, and it was inevitable that it would accelerate as prices continued to climb. the pandemic.” In San Jose, average prices rose from $1.3 million in the second quarter of 2020 to well over $1.6 million this spring. During that time, San Diego went from 695 $000 to $940,000, and Seattle went from $600,000 to around $850,000.
By comparison, the Sunshine State, though in decline, is proving remarkably resilient. Each of the eight Florida cities in Pinto’s universe ranks in the HPA’s top ten year-over-year. In July, all continued to improve, with Tampa and Miami up 1.1%, and Deltona making one of the best performances in the country with a positive result of 3.1%. Florida’s big advantage is that even though prices have risen sharply, its offerings are still very affordable compared to most other coastal markets. In the second quarter of this year, the average home in Jacksonville fetched $392,000, well below the national average of $457,000. Despite the HPA close to the national leader in recent months, Deltona is still considered the cheapest major market in the state with a standard of $354,000. The Midwest and East Coast are generally doing well. The Heartland cities remained relatively inexpensive (Cleveland, Columbus, Pittsburgh), and even New York, Boston, and Washington, DC did not witness the Brobdingnagian appreciation that so hammered the competitiveness of large Western metros.
Second trend: The top of the range takes the hit
Pinto recently unveiled an extraordinarily informative new metric. The metric analyzes its data to show the up-close, month-over-month performance of different price levels. Pinto deploys the standard AEI breakdown into four levels, low, low-medium, medium-high, and high. Buyers in the first two categories benefit greatly from the credit sponsored by the FHA, Fannie Mae and Freddie Mac. Buyers of the two “high” tranches generally obtain “portfolio” loans from banks that do not offer the particularly favorable terms granted to government-backed mortgages.
During the pandemic, “medium-high” and “high” outperformed the bottom two brackets. That’s very unusual in a real estate windfall. The reason, Pinto says, is that the sharp decline in mortgage rates has disproportionately boosted the high end. “Expensive homes are much more price sensitive than those in lower tiers,” says Pinto. “When rates go up, low-income buyers can still get FHA, Fannie and Freddie mortgages. This is because these lenders still allow buyers to qualify even when their debt to income repayment ratios increase much more. People who buy expensive houses do not have this latitude. They are on the free housing market. Private lender debt to income standards is fixed and does not increase. Buyers of expensive homes aren’t drinking in the punch bowl as the Fed soars as rates rise, people considering expensive homes can’t get the bank loans that require much higher down payments. and impose much stricter debt-income bogeymen than those faced by low-income borrowers.
From January to March 2022, “high” and “medium-high” each increased at an average monthly rate of more than 2%, beating both “low” and “low-medium”. But from May, the housing hierarchy was reversed. In July, the top two designations both dropped; “high” fell 1.9%, building on a 0.9% drop from May to June. The government-backed bottom end continued to blow. For July, “low” increased by 1.6% compared to June, and “low-medium” increased by 0.7%. “The biggest deaths going forward will be in the expensive end of the market,” says Pinto. “Of course, many of the most expensive homes are on the West Coast, which has a particularly serious affordability problem.” But because higher rates exert a much stronger pull in the upper echelons of any metro, he adds, the class that has pioneered the past two years will drive the load lower from from here, at least in the next few months.
Pinto adds that the tough outlook for the upper tiers is not a big threat to the overall market. “The people who bought these houses have the lowest unemployment rate and the highest and most stable incomes,” he says. “They won’t default on their mortgages. If they put their house up for sale and prices drop, they can take the house off the market, continue to live in it, and wait for a rebound. The danger to watch is the drop in demand in the lower brackets which represent the vast majority of sales. And since the prices there have also exploded and continue to swing, this drop is looming. “As demand drops because affordability deteriorates more in the lower two categories, you’ll see more foreclosures that will add to supply,” says Pinto. Families will save more and more by renting instead of buying, extending the time to sell and inflating inventory. Although expensive homes will be hit first, the mainstream market will eventually spearhead the downward spiral
Third trend: prices will fall for the rest of 2022
What will be the speed of this spiral? Using his new measurements, Pinto makes an estimate using simple calculations. In addition to tracking actual closing numbers through July, Pinto charts the future by rolling out numbers from Optimal Blue. This home loan data platform reports contract prices when buyers “lock in” their mortgages. These numbers enter the public record 45 to 60 days later. The Optimal Blue preview allows Pinto to accurately forecast HPAs for August and September. It then extrapolates those points to predict where housing will end in 2022.
Pinto now predicts that by the December holidays, average home prices will hover around 6% higher than 12 months earlier. But the first seven months of 2022 are already in the box, and they show a total gain of 10% from January to July. To record a 6% increase for the year, prices must to fall 4% over the next five months. This course would mark a severe reversal of the ever-rising tide of the past few years. And the decline will be anything but constant across America. “The declines in the West will continue to be the most severe,” says Pinto. “The high end will also continue to be the hardest hit.” So far, America faces nothing resembling an outright crash. But for the average homeowner, it will bring little joy that the closer they get to the holidays, the more they will see the value of their cherished ranches and colonials fade.
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