After six straight months of gains, home prices in the United States have climbed to an all-time high, recovering from a brief downturn at the start of 2023 according to new data.
The S&P CoreLogic Case-Shiller national home price index rose 0.6% in July compared to June. This marks a robust 5.3% price increase since the beginning of 2022, completely reversing the 5% drop seen between last June’s peak and January of this year.
The gains come during a period where mortgage rates crept back up towards 7%, causing many homeowners to hesitate putting their properties on the market. This limited supply coupled with ongoing strong demand from buyers has led to bidding wars for the homes that are listed for sale. Realtor.com reported a 7.9% year-over-year decline in resale home inventory in August.
“Buyer demand continues to outmatch housing supply, creating upward pressure on home prices despite the fact that home purchase costs are taking up an outsized share of household incomes,” said Realtor.com Chief Economist Danielle Hale.
Rising mortgage rates have also started to dampen the new home market, with sales of newly constructed homes dropping to a five-month low in August according to Tuesday’s data from the government. However, the market for existing homes remains competitive due to low supply.
On an annual basis, home prices were up 1% nationally compared to July 2021 according to the S&P index. This is an improvement from June when annual price growth was flat. Among 20 major metro areas, Chicago, Cleveland and New York saw the strongest yearly price gains in July, while Las Vegas and Phoenix experienced declines of 7.2% and 6.6% respectively over the past year.
What’s Causing the Turnaround?
After hitting their peak last June, home prices began declining as the rapid rise in mortgage rates quickly cooled demand, giving buyers more leverage during negotiations. Rates on 30-year fixed mortgages reached almost 7% by October, more than double the start of 2022.
But rates have moderated slightly in recent months, hovering between 6-7%. This stability has drawn some buyers back into the market, even though higher rates mean purchasing power is diminished compared to a year ago.
At the same time, many current homeowners have been unwilling to sell their properties and give up the ultra-low rates they locked in during the pandemic. This constricted the inventory of homes for sale, shifting bargaining power back towards sellers.
The turnaround in prices suggests the market has found a tentative balance point between buyers and sellers amid the current economic conditions. However, the outlook remains uncertain.
“Going forward, a recession could cause job losses and severely reduce buyer demand. However, home price declines are likely to be muted because tight inventory will prevent oversupply conditions from developing,” said Selma Hepp, deputy chief economist at CoreLogic.
Uneven Recovery Across Regions
While home prices nationally are back to peak levels, the recovery has been uneven across different regions.
Some of the areas that saw the biggest run-ups in prices during the pandemic have experienced the largest declines over the past year. Phoenix, Las Vegas and other fast-growing Sunbelt cities drew scores of remote workers during the pandemic seeking more space and affordable housing.
Now that in-office work has resumed for many and mortgage rates have jumped, the frenzied demand has cooled considerably in these areas. Meanwhile, more expensive coastal cities like San Francisco and New York have seen prices remain relatively resilient or even notch moderate gains as work-from-home flexibility enables more workers to relocate from pricier urban cores.
The pandemic-related shifts in housing preferences provoked localized booms and busts that led to this divergence across metro area markets. However, tight inventory is expected to prevent significant price drops nationally as long as the broader economy avoids a major downturn.
What It Means for Buyers and Sellers
The July data confirms the housing market has firmly rebounded from its brief dip, though mortgage rates remain a challenge. This means sellers can expect strong interest in their listings, but gone are the days of homes attracting dozens of offers the day they are listed.
“Competition for homes priced appropriately is still heated in many markets, but the days of sellers getting whatever they want are behind us,” said Nicole Bachaud, economic data analyst at Zillow.
For buyers, affordability will continue to be squeezed by high prices and interest rates. But the easing competition and slowing price growth have opened a window for negotiation not seen since 2020.
“Home shoppers tempted to wait out the market in hopes of further price cuts shouldn’t drag their feet too long. Demand remains relatively strong given the limited number of homes for sale,” Bachaud added.
While this reduced competition is a silver lining for buyers, purchasing power has fallen significantly from last year due to higher mortgage rates. Experts say the keys to finding success as a buyer are assessing your budget accurately based on current rates, exploring alternative financing options such as adjustable-rate mortgages, and making competitive offers without overextending your finances.
Outlook Hinges on Economy
Looking ahead, experts say the housing market outlook is highly dependent on broader economic conditions. So far, the job market remains strong. But high inflation and rising interest rates have led to growing fears of a recession.
If unemployment remains low and wages continue rising, buyer demand may remain resilient enough to keep home prices stable or rising moderately. But a significant economic downturn leading to widespread job losses could upend the market.
“The overall state of the economy will determine if the housing market returns to the imbalance of buyers and sellers seen just a few months ago or if it remains level,” said Jeff Tucker, senior economist at Zillow.
Yet even in a recession scenario, some experts say home prices are unlikely to see large declines, kept in check by limited supply and a demographic tailwind from Millennial buyers in their prime home-purchasing years.
The recent whipsawing of the market after years of rapid price growth highlights the uncertainties that exist when economic conditions shift swiftly. But for now, buyers and sellers alike can expect home values to hold at elevated levels barring a major outside shock.