When a Fed economist says the U.S. housing market has entered a “difficult [housing] correction”, it would be wise to believe them. When it comes from the mouth of Fed Chairman Jerome Powell, it’s more of a warning.
Powell is right: not only is real estate activity continuing to fall, but U.S. home prices are falling for the first time since 2012.
Unlike the housing correction of the 2000s, which saw US home prices fall 27% between 2006 and 2012, this ongoing housing correction is not underpinned by bad debt or a glut of debt. offer. Instead, this correction is motivated by what Fortune calls it “affordability under pressure”. The 43% rise in US home prices, coupled with soaring mortgage rates, has simply pushed affordability beyond what many borrowers can bear.
The only levers available to depressurize affordability are falling mortgage rates or house prices. In recent months, we’ve seen the latter.
“House prices continue to face significant pressure in light of soaring borrowing costs,” said Selma Hepp, deputy chief economist at CoreLogic. Fortunee. “[The] a significant decline in demand from home buyers will continue to weigh on home prices, bringing them closer to local incomes.
Nationally, home prices are down 1.3% from their 2022 peak. At least, that’s according to Case-Shiller’s lagged reading through August. However, markets like Austin and Reno are down 10.2% and 8.4%, respectively, while markets like Des Moines and Baltimore remain at all-time highs. (Here’s the change in the nation’s 400 largest markets.)
But what comes next?
To better understand where regional home prices could go in 2023, Fortune contacted CoreLogic to see if the company would provide us with its updated November assessment of the nation’s largest regional housing markets. To determine the likelihood of falling home prices in the region, CoreLogic assessed factors such as income growth projections, unemployment forecasts, consumer confidence, debt-to-income ratios, affordability, rates mortgages and inventory levels. Next, CoreLogic classified regional real estate markets into one of five categories, grouped by the likelihood that home prices in that particular market will decline between September 2022 and September 2023. Here are the groupings the real estate research firm used to November review:
- Very high: More than 70% chance of falling prices
- High: 50% to 70% chance
- Medium: 40% to 50% chance
- Down: 20% to 40% chance
- Very slow: 0% to 20% chance
Of the 392 regional real estate markets measured by CoreLogic, zero markets currently have a “very low” probability of falling house prices over the next 12 months. Another 6 housing markets are in the “low” group and 33 markets are in the “medium” group. Meanwhile, CoreLogic placed 65 markets in the “high” camp and 289 markets in the “very high” ratings camp.
The trajectory is clear: the list of U.S. regional real estate markets headed for a negative year-over-year home price reading is growing. To see the change, simply compare CoreLogic’s November 2022 valuation (see chart above) to its May 2022 valuation (see chart below).
The November assessment reveals that 354 markets have a greater than 50% chance of registering a negative year-over-year reading (i.e. markets in the “high” or “very risky” risk groups). high”) over the next 12 months. That’s up from 335 markets in October that had more than a 50% chance of dropping home prices. In August, 125 markets were at risk. In July, there were 98 markets at risk. In June, 45 markets were at risk. And in May, only 26 markets (see chart above) fell into these “high” or “very high” risk camps.
What’s going on? The house price correction continues to spread.
It didn’t take long for Bay Area techs in 2020 to realize their new freedoms from afar, coupled with historically low mortgage rates, made the pandemic the perfect time to buy in “Zoomtowns” like Boise .
At first, it didn’t matter that the pandemic housing boom caused Boise home prices to become significantly detached from local incomes. Well, that was until skyrocketing mortgage rates disrupted the calculation of selling his home in Santa Clara and moving to Boise. Once this migration slowed, Boise quickly entered a historically strong correction.
The correction is so strong that Boise, which saw its rate peak year-over-year at 47% between July 2020 and July 2021, has already turned negative in 2022 on a year-over-year basis. Indeed, home prices in Boise are down 7.1% from their 2022 peak, and down 4.3% year-over-year.
To date, only 1% of the nation’s 392 largest real estate markets are negative on an annual basis. That said, don’t ignore Boise. The big question: Are markets like Boise only correcting because their fundamentals have gone so far out of whack? Or are markets like Boise just correcting first because their fundamentals have gone so haywire? Analysis provided by CoreLogic – which finds 354 markets are at “high” or “very high” risk of posting a negative year-over-year reading in September 2023 – suggests this could be the last.
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