Mortgage rates began to take a toll on price growth as early as this spring. But prices remained more resilient than other market indicators, according to the S&P Corelogic Case-Shiller Index. Related FHFA report shows similar trend of decelerating house-price growth as rates rise.

Inman News and Housing Wire

The forces fueling home price growth for the past two years have been weakening in recent months as the market finds itself in the midst of a multi-month slowdown.

Home prices rose by 1 percent in May after accounting for seasonal patterns, according to the S&P Corelogic Case-Shiller Index numbers released on Tuesday. Prices were up nearly 20 percent year over year.

By normal standards, this still represents a remarkably high rate of growth for the prices of U.S. homes. 

“Housing data for May 2022 continued strong, as price gains decelerated slightly from very high levels,” S&P Dow Jones Industrial Managing Director Craig Lazzara said in a statement.

But throughout the COVID-19 pandemic, conditions have been far from normal. Cheap mortgages in the first couple years of the pandemic helped drive up demand for homes — and the prices for which they would sell — to previously unseen levels. 

Since the start of the year, however, mortgage rates have climbed from around 3 percent to well over 5 percent. And after posting its second consecutive month of decline in price increases, the housing market in May reached its lowest rate of price growth since July 2020, by Case-Shiller’s measure.

“We’ve noted previously that mortgage financing has become more expensive as the Federal Reserve ratchets up interest rates, a process that was ongoing as our May data were gathered,” Lazzara said in the report. “Accordingly, a more-challenging macroeconomic environment may not support extraordinary home price growth for much longer.”

Another measure of home price growth released Tuesday painted a similar picture. Prices rose by 1.4 percent in May on a seasonally adjusted basis, and were up 18 percent year over year, according to the Federal Housing Finance Agency House Price Index.

This FHFA estimate caps three consecutive months of slowdowns in price growth since the 1.9 percent monthly increase observed in February.

​​“House prices continued to rise in May, but at a slower pace,” FHFA supervisory economist Will Doerner said in the HPI report. “Since peaking in February, price appreciation has moderated slightly. Price growth continues to remain above historical levels, supported by the low inventory of properties for sale.”

Despite this slowdown, prices have so far proven more resilient in the face of this higher-rate environment than other measures of home market activity. 

The number of homes sold, general residential construction activity, and the extremely seller-friendly bargaining conditions in previous months have all been eroding quickly, even as the ultimate sale price of a typical home has continued to climb.

But in some parts of the country, the price-growth party appears to be already over.

Throughout the Pacific region, monthly price growth in May slowed to 0.2 percent, according to FHFA’s measure. That’s the equivalent of the national price increases that were occurring in April 2020, before the home market’s stunning surge kicked in after the initial shutdown-induced shock at the beginning of the pandemic.

Prices were still rising fastest in the New England area, which saw 2 percent price growth from April to May.

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Home-price growth nationwide downshifted further in May, posting a 19.7% annual gain, compared with a 20.6% increase in March and a 20.4% jump in April, the latest S&P CoreLogic Case-Shiller Home Price Indices report shows.

The report’s 10-City Composite Index recorded an annual increase of 19%, down from 19.6% the prior month. The 20-City Composite Index posted a 20.5% annual gain, down from 21.2% in April.

The highest year-over-year gains in May among the 20 cities were posted by Tampa, 36.1%; Miami, 34%; and Dallas, 30.8%. 

“Housing data for May 2022 continued strong, as price gains [nationally] decelerated slightly from very high levels,” says Craig J. Lazzara, Managing Director at S&P Dow Jones Indices. 

The U.S. National Index recorded a month-over-month increase of 1% on a seasonally adjusted basis. The 10-city and 20-city composites each posted monthly gains of 1.3%. 

Only four of the 20 metro areas tracked, however, posted annual price increases that were higher in May, compared with April.

“At the city level, we also see evidence of deceleration,” Lazzara added. “Price gains for May exceeded those for April in only four cities. As recently as February of this year, all 20 cities were accelerating.”

The S&P CoreLogic Case-Shiller U.S. National Home Price Index is a leading measure of housing prices. It tracks the value of single-family housing nationwide, while the 10-city and 20-city composite indices track single-family home values in select metro areas. 

Lazzara said the cost of a mortgage is rising as the Federal Reserve continues to bump up interest rates. “Accordingly, a more-challenging macroeconomic environment may not support extraordinary home-price growth for much longer,” he concluded. 

Another report released Tuesday by the Federal Housing Finance Agency (FHFA) shows housing prices nationwide posted a 1.4% monthly gain in May, compared with a 1.5% gain in April. For the 12 months ending in May, the FHFA House Price Index was up 18.3% — compared with a 19% annualized gain in March and an 18.8% increase in April.

“House prices continued to rise in May, but at a slower pace,” said Will Doerner, supervisory economist in FHFA’s Division of Research and Statistics. “Since peaking in February, price appreciation has moderated slightly. Price growth continues to remain above historical levels, supported by the low inventory of properties for sale.”

As HousingWire recently reported, several leading housing-market economists project the deceleration in home prices will continue in near the future as homebuyer demand decreases in the wake of fast-rising rates — with one economist even suggesting prices could decline slightly in some particularly hot markets across the nation.

“Housing demand weakened noticeably as growing concerns about affordability contributed to non-seasonal declines in sales, resulting in a slight increase in inventory and more moderate price appreciation,” according to the Federal Reserve’s most recently released Beige Book report — based on data and reports current as of mid-July. 

The Beige Book reports, published eight times a year, are based on interviews with bank directors, business and community organization leaders, economists, market experts and other sources.

“May marked the first month of the year (in several years) where interest rates floated above 5%, and the elevated rates helped to noticeably pull back price growth as affordability continues to wear on homebuyers,” Zillow economist Nicole Bachaud said, reacting to the Case-Shiller report. “Annual price growth decelerated in May, now below 20% … and is likely to continue as affordability challenges persist.

“Slowing price growth is a reflection of changing tides in the housing market. Sales volume has slumped, inventory is on the rise and homes are spending more time on the market,” Bachaud continued. “… The housing market is undergoing a sea change that appears to have rendered the days of historic price growth as a thing of the past.”