Talk about a 180. Not only has the Pandemic Housing Boom—which pushed U.S. home prices up 42% over the past two years—fizzled out, but we’ve seen it replaced by a “housing recession.” Across the nation, home sales are plummeting and inventory levels are spiking. This economic contraction has housing slowing down at its fastest clip since 2006.
Heading forward, the housing market will continue to slow. The Federal Reserve put upward pressure on mortgage rates as a way to temporarily sideline homebuyers. The subsequent decline in home sales creates economic contractions across the economy. It’s already causing layoffs in sectors like homebuilding and mortgage lending. Soon, it’ll see cutbacks in durable good production, like window production, and cutbacks in commodities like lumber and steel. As economic contractions spread throughout the economy, it should help to chip away at inflation.
“The most frequent way we enter into recession is the Fed raises rates to fight inflation … the leading indicator for this type of recession is housing,” Bill McBride, author of the blog Calculated Risk, tells Fortune. “It [housing] is not the target, but it [housing] is essentially the target.”
McBride, who is a leading expert on housing cycles, doesn’t think a broad U.S. recession is imminent this year. However, he says, the weakening housing market tells us a Fed-induced recession could be on the horizon.
Now that the U.S. housing market has entered into a recession, it raises the question: What’s coming next for home prices? On Tuesday, the Case-Shiller U.S. National Home Price Index will report home prices grew at a double-digit rate between May 2021 and May 2022. However, that data is lagged. The real story, industry insiders say, is one of sharp decelerating price growth. By this time next year, McBride predicts home prices could be up 0% on a year-over-year basis. (Freddie Mac disagrees and says national house prices are set to rise another 4.4%.)
Regardless of where national house prices go next, it won’t be even across the nation. Already, markets like Boise and Phoenix are contracting significantly faster than the rest of the nation.
To get an idea of what might be on the horizon regionally, Fortune reached out to CoreLogic to see if the firm would provide us with its assessment of the nation’s largest regional housing markets. To determine the likelihood of regional home prices dropping, CoreLogic assessed factors like income growth projections, unemployment forecasts, consumer confidence, debt-to-income ratios, affordability, mortgage rates, and inventory levels. Then CoreLogic put regional housing markets into one of five categories, grouped by the likelihood that home prices in that particular market will fall over the coming 12 months. Here are the groupings the real estate research firm used for the July analysis:
- Very high: Over 70% chance of a price dip
- High: 50%–70% chance
- Medium: 40%–50% chance
- Low: 20%–40% chance
- Very Low: 0%–20% chance
Between May 2022 and May 2023, CoreLogic predicts U.S. home prices are poised to rise another 5%. That’s nationally. Regionally, it’ll vary—a lot.
Among the 392 regional housing markets it looked at, CoreLogic found 98 markets have a greater than 50% chance of seeing local home prices decline over the next 12 months. In June, only 45 markets had a greater than 50% change of a home price decline over the next 12 months. In May, just 26 markets fell into that camp.
“Concerns about cooling of housing market demand is spreading across more markets particularly as [a] higher share of home sellers are starting to reduce their asking prices and home price growth is slowing. The number of markets with more than 50% probability of price decline doubled again compared to month prior, but remains concentrated to regions that saw particularly strong price growth over the last two years or areas with population out-migration,” Selma Hepp, deputy chief economist at CoreLogic, tells Fortune.
Of those 392 regional housing markets that CoreLogic measured, 84 markets in July were in the “very low” risk grouping. Another 145 housing markets landed in the “low” group, 65 markets qualified for the “medium” group, and 70 markets were in the “high” group. CoreLogic categorized 28 regional housing markets as having a “very high” likelihood of a house price drop over the coming year. That includes major markets like Boise, Philadelphia, and San Francisco. That “very high” grouping also includes several small and mid-sized markets along the West Coast and in the Northeast.
In some of these at-risk markets, including San Francisco, that home price “top” might have already been blown-off. Prices are already falling in the Bay Area on a month-over-month basis. It remains to be seen if those price drops will last long enough for the market to actually get a year-over-year negative reading in 2023.
“We’ve definitely seen a drop in sale prices over the last two months due to the double whammy of the Nasdaq correction and rise in interest rates,” Kevin Chiao, a broker in the Bay Area, tells Fortune. “I initially thought the Bay Area market wouldn’t see much price decline due to lack of inventory, but it seems I may have been wrong.”
The U.S. housing market got priced to 3% mortgage rates. Now it’s finding equilibrium at 5.5% rates. Some firms, including John Burns Real Estate Consulting and Moody’s Analytics, predict that sharp mortgage rate spike puts “juiced up” markets—those that became that saw home prices become the most detached from economic fundamentals during the Pandemic Housing Boom—at the highest risk of home price dips. That makes sense considering those “bubbly” markets are the very places (see chart above) that are slowing the fastest right now.
CoreLogic disagrees. While the real estate research firm pinpoints some bubbly markets like Boise as primed for a home price dip, most of the markets it deems as having “very high” or “high” odds of a home price correction are high-priced coastal markets. Some of these markets, like San Francisco and New York City, are vulnerable because of the population declines they experienced during the pandemic. Others simply have strained affordability.
A growing chorus of housing economists believe we could be headed for some regional home price declines. But that doesn’t mean it’s a housing bust. Unlike 2008, this time around homeowners are in better financial shape and we’ve outlawed the worst financial products from the 2000s. That coupled with tighter supply is why many housing economists don’t think “overvaluation” will lead to another crash.
McBride thinks a housing market like Boise—where home prices soared nearly 60% during the pandemic—could see a home price decline of around 5% to 10% over the coming year. Not only have record Boise house prices priced out many locals, but flatlining tech stocks could put cold water on the market’s exuberance. That said, in McBride’s eyes that’s hardly a dire scenario.
“So what? You’re still up 50%,” McBride says.