In June, Fed Chairman Jerome Powell told reporters that the overheated US housing market – which has seen US home prices rise more than 40% in just over two years – had need a “reset”. And higher mortgage rates, he said, would slowly bring “equilibrium” back to the market.
“We saw [home] prices have risen very, very sharply over the past two years. So that’s changing now…I would say if you’re a homebuyer or someone or a young person looking to buy a house, you need a little reset. We need to get back to a place where supply and demand come together again,” Powell said.
While Powell was unsure what the Fed’s housing “reset” would mean for house prices, Fortune speculated that this meant prices would fall. It looks like we were right.
According to the latest Case-Shiller report released on Tuesday, US home prices fell another 0.8% in September. This is the third straight monthly decline in home prices since Powell’s statement in June. Prior to 2022, the seasonally adjusted national Case-Shiller home price index had not posted a month-over-month decline since the housing crash bottomed in 2012.
This latest Case-Shiller report, which showed US home prices falling 2.2% since June, means we have entered the second-biggest post-WWII home price correction. On paper, it’s on par with the 2.2% drop between May 1990 and April 1991, however, given that the index is a three-month average, we know that October’s numbers will exceed that mark. That said, it is still well below the 26% peak-to-trough decline that occurred between 2007 and 2012.
How can this 2.2% decline already be considered the second largest post-WWII correction? It comes down to the fact that, historically speaking, home prices nationwide have been fairly stable. Sellers resist going below market prices unless the economy forces their hand.
“I think the religion that people had from 1946 to 2008, that house prices always go up, is dead. My parents believed it was literally inconceivable for [home] lower prices,” Glen Kelman said recently. Fortune. The housing crash that followed in 2008 shattered that “religion” and taught buyers and sellers, he said, that house prices can indeed fall. “So people respond [now] so that [correction] with almost PTSD, and they withdraw much faster.
It’s not just average Joes who know prices can fall – the 2008 example has also made institutional firms and builders more alert. These companies are a big reason house prices are falling so rapidly right now.
“When the shiitake mushrooms hit the fan, you [investors] want to go out first. The way to do this is to determine where the lowest sale is and be 2% below. And if it don’t sell the first weekend, turn it down [again]”, Kelman said recently Fortune. Property investors, including Redfin’s iBuyer business and builders, are helping to drive prices down faster this time around, he said.
Another reason why prices could fall so quickly is simply because house prices have risen so high, so quickly during the pandemic. And now that mortgage rates have also skyrocketed, many buyers are either overpriced or have lost their mortgage eligibility altogether.
When asked in September to clarify his comment on June’s housing “reset”, Powell told reporters that the U.S. housing market had entered a “difficult [housing] correction.” While this housing correction has clearly arrived, it is hardly uniform across the country.
Among the 20 major U.S. real estate markets tracked by Case-Shiller, home price declines range from just -0.55% in Atlanta to -10.4% in San Francisco. (Chicago and Cleveland remain at their 2022 record prices).
It’s not just San Francisco: the western half of the country, including markets like Seattle (down 9.16%) and Phoenix (down 3.86%), is clearly the epicenter of the current correction house prices. What’s going on? The western half of the country, where affordability is a bigger issue, is more vulnerable to interest rate shocks. In markets like San Francisco and Seattle, monetary tightening means their mighty hubs of tech jobs are shrinking just as tech stocks are plunging. Meanwhile, rising mortgage rates propelled frothy markets in booming cities like Phoenix above.
The correction continues to be milder in the Northeast and Midwest. Markets like New York and Detroit are only down 1.58% and 0.81% from their respective highs. Since the beginning of the real estate cycle this summer, these markets have not been flooded with inventory from iBuyers and builders. This gave sellers in markets like New York and Detroit a bit more leeway.
It is true that we are in a housing correction. It is also true that owners in general are still doing quite well. In fact, “good” might be an understatement.
So far, the 2.2% decline in housing correction prices between June and September has only slightly dampened the massive 41.29% price rise caused by the pandemic housing boom. Since March 2020, house prices are still up 38.33%.
Not only have landlords been protected from rent shocks, but many have also benefited from refinancing at 2% or 3% mortgage rates during the pandemic.
Where do we go from here? It depends who you ask.
Zillow economists believe the house price correction will end by January 2023, and we will see a 0.8% gain in home values over the next 12 months. Meanwhile, economists at Morgan Stanley, Goldman Sachs and Moody’s Analytics believe house prices will fall about 10% from peak to trough. While companies like Zonda and KPMG think we’re headed for a 15% peak-to-trough drop in US home prices.
Of course, when Zillow or Moody’s say “US home prices”, they are talking about a national aggregate. Everything that comes next will surely vary by market.
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