A sign is posted in front of a home for sale on July 14, 2022 in San Francisco, California. The number of homes for sale in the US rose 2 percent in June for the first time since 2019.
Justin Sullivan | Getty Images
Rising mortgage rates and inflation in the overall economy led to a sharp drop in real estate demand in June, leading to a slowdown in real estate prices.
Home prices are still higher than a year ago, but earnings slowed at an unprecedented pace in June, according to Black Knight, a mortgage software, data and analytics company that began tracking the metric in the early 1970s. The annual inflation rate fell by two percentage points from 19.3% to 17.3%.
The gains are still strong due to an imbalance between supply and demand. There has been an acute housing shortage on the housing market for years. Strong demand during the coronavirus pandemic exacerbated them.
Even when home prices plummeted dramatically during the 2007-09 recession, the sharpest slowdown in a month was 1.19 percentage points. With an overall stronger housing market, prices aren’t expected to fall nationwide, but higher mortgage rates are certainly taking their toll.
The average interest rate on the 30-year fixed-rate mortgage topped over 6% in June, according to Mortgage News Daily. It has since fallen back into the low 5% range, but that’s still significantly higher than the 3% range rates earlier this year.
“The slowdown was broad-based among the top 50 metro-level markets, with some areas experiencing an even more pronounced slowdown,” said Ben Graboske, president of Black Knight Data & Analytics. “In fact, 25% of major U.S. markets saw growth slow by three percentage points in June, with four of those decelerating by four or more points this month alone.”
Although this was the sharpest slowdown on record nationally, Graboske said the market would need to experience six more months of this type of slowdown for price growth to return to long-term averages. He reckons it will take about five months for interest rate effects to be fully reflected in house prices.
The markets with the sharpest falls are those that previously had the highest prices in the country. Average home values in San Jose, California, have fallen 5.1% over the past two months, the largest drop of any top market. That lowered the price by $75,000.
In Seattle, prices are down 3.8%, or $30,000, over the past two months. San Francisco, San Diego and Denver round out the top 5 markets with the biggest price cuts.
The slowdown in prices has coincided with a sharp rise in the supply of homes for sale, which is up 22% over the past two months, according to the Black Knight. However, inventories are still 54% below 2017-19 levels.
“With a national shortage of more than 700,000 offers, it would take more than a year with such record increases for inventories to fully normalize,” Graboske said.
Price declines won’t hit the average homeowner as badly as they did during the Great Recession because homeowners today have significantly more equity. Rigorous underwriting and several years of strong price increases have pushed home equity ratios to record highs.
Still, the strong demand in the market lately might pose a problem for some. About 10% of mortgage-backed properties were purchased in the last year, so price declines could cause some borrowers to significantly reduce their equity positions.