Will housing prices flatten or collapse?

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Home price appreciation is slowing rapidly across the country under the weight of higher mortgage rates, with typical property values ​​even declining month-over-month in about a fifth of major metropolitan areas in July. Clearly, the slowdown is necessary if Federal Reserve policymakers are to rein in inflation and restore affordability to the housing market. The challenge is to prevent the deceleration from turning into a collapse, but monetary policymakers have a chance of doing so, provided unpredictable external forces cooperate.

Nationally, the value of typical homes rose a seasonally adjusted 0.7% last month from June, according to data from the Zillow Home Value Index released Friday. This corresponds to an 8.5% appreciation in home values ​​on an annualized basis, a considerable decline from a pace of around 25% in mid-2021. The Fed is coming hard and fast to the 5% pace that was common in the five years before the pandemic, which would finally be in line with its goal of bringing inflation under control.

But will the market come to an abrupt halt when it hits that 5% pace, or at least avoid going negative? In the end, everything depends on the evolution of inflation in the broad sense; the Fed’s determination to raise interest rates; and whether policymakers end up driving up unemployment in the process. The odds of a positive result appear slightly better in light of recent data.

House prices are not directly part of the inflation index, as housing is considered an investment rather than a consumer good. Instead, the main US inflation indices follow a concept called equivalent owners’ rent, which is supposed to reflect the cost that owners would incur if they had to rent their house. Due to the original methodology, housing inflation is highly correlated with housing market measures, but it tends to lag market prices by several months.

The United States received encouraging news on Wednesday when the consumer price index showed tentative signs of easing inflationary pressures. Core prices – which exclude food and energy volatility – rose just 0.3% month over month, an annualized pace of 3.8%. Without the lagged housing component, core inflation would have only increased by around 0.1%, or around 1.7% at an annualized rate. This adjusted version of underlying inflation could be the gauge to watch in the coming months, especially if the Zillow housing index continues to converge towards the target of around 5%.

Of course, a month doesn’t make a trend, and Fed policymakers probably need to see a few more inflation reports like Wednesday’s to change their approach. Another disruption in energy markets that pushes up oil and gasoline prices would mean that all bets are off. Such an outcome would certainly reduce the chances of house prices emerging from this tightening cycle without a few scars.

Meanwhile, policymakers are navigating treacherous territory. Look no further than California for an example of how quickly momentum can shift from appreciation to depreciation. As recently as March, home values ​​in the San Francisco Bay Area were still rising, and now the declines in San Francisco and San Jose are among the steepest in the country, as stocks have quickly returned to lows. pre-pandemic levels after a high-profile shortfall. Until last month, damage was mostly confined to cities in California, as well as Austin, Texas; Seattle; and Ogden, Utah. But monthly declines in home values ​​have now engulfed 22 of the nation’s 100 largest metropolitan areas. They include Denver; Boise, Idaho; Phoenix; and Pittsburgh.

But nationally, inventory is still extremely tight, supporting home values ​​for now. Households now have much healthier balance sheets than they did during the housing crisis, which means there is unlikely to be a forced sale unless people start losing their jobs. All of this means there is still a chance that owners will escape this squeeze cycle with their equity intact. They just need a lot to be okay.

More other writers at Bloomberg Opinion:

• Fed damage to housing market may have lasted for years: Allison Schrager

• US must bribe landlords to adopt density: Eduardo Porter

• Do you want to solve the housing crisis? Kill Zoning: Virginia Postrel

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.

More stories like this are available at bloomberg.com/opinion


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