Inman News and GlobeSt.com

A reversal in home price growth in July deepened into August as prices declined by 0.9%, according to the latest S&P CoreLogic Case-Shiller report. They remained up 13% from last year.

Home prices underwent an even steeper downturn in August after they had already dipped the previous month for the first time in years, according to two recent estimates.

In the latest S&P CoreLogic Case-Shiller report, home prices dropped by 0.9 percent nationwide from July to August even after accounting for normal seasonal patterns. That’s a quickened pace compared to the 0.2 percent drop from the previous month.

The declines were part of a broad trend. None of the 20 cities monitored regularly by the Case-Shiller report escaped a monthly price decline in August.

And while home prices remain 13 percent higher than this time last year, annual growth is decelerating quickly with each passing month, S&P Dow Jones Indices Managing Director Craig J. Lazzara said in the report.

“As the Federal Reserve moves interest rates higher, mortgage financing becomes more expensive and housing becomes less affordable,” Lazzara said. “Given the continuing prospects for a challenging macroeconomic environment, home prices may well continue to decelerate.”

As mortgage rates began to spike from their pandemic-era lows earlier this year, the housing market underwent a months-long cooldown. But for much of that time, breakneck price growth was merely slowing, even as prices lurched higher. But now, that slowdown has deepened to the point that prices have actually begun to fall off their all-time highs.

Case-Shiller is not the only national measure of home prices that has reported sustained and accelerating monthly declines.

The Federal Housing Finance Agency this week released its house price index for the same period, finding a 0.7 percent decline from July to August. That’s a tick faster than the 0.6 percent decline reported the previous month.

The government analysis of annual growth painted roughly the same picture as the Case-Shiller report, with a 12 percent rise in prices from August 2021 to the same time this year.

“This is the first time since March 2011 that the index has seen two consecutive months of decline,” Will Doerner, supervisory economist in FHFA’s Division of Research and Statistics, said in the report. “The recent monthly decline solidifies the deceleration of 12-month house price growth that began earlier this year. Higher mortgage rates continued to put pressure on demand, notably weakening house price growth.”

While FHFA’s estimate also found price drops were widely felt across the country, prices were a bit more resilient in the New England region. Prices in these Northeastern states actually rose 0.4 percent from July to August, after accounting for seasonal trends.

But the price declines that most regions felt hit hardest in the landlocked states of the American West. These states, which together comprise most of the Mountain Time Zone, saw home prices fall a full 2 percent after accounting for seasonal patterns. That’s nearly three times as fast as the price decreases in the U.S. at large.

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Case-Shiller: Home Prices Decelerate Like ‘Never Before’

It’s been more than 12 years since the Index saw such a dramatic fall.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index issued Oct. 25 showed a -2.6% difference between its July and August figures, the largest month-over-month deceleration in the history of the index.

The Case-Shiller Home Price Indices for August is a three-month average of June, July and August closing prices. June closing prices include some contracts signed in April, so there is a significant lag to this data, reported Bill McBride of the Calculated Risk blog.

The MoM decrease in Case-Shiller was at -0.86% seasonally adjusted. This was the second consecutive MoM decrease, and the largest MoM since February 2010.

Because this includes closings in June and July, this suggests prices fell sharply for August closings, according to McBride.

July’s deceleration now ranking as the second largest.

On a seasonally adjusted basis, prices declined in all Case-Shiller cities on a month-to-month basis. The largest monthly declines seasonally adjusted were in San Francisco (-3.7%), Seattle (-2.9%), and San Diego (-2.5%). San Francisco has fallen 8.2% from the May 2022 peak.

Homebuyers Facing a Harsh New Reality

John Pawlowski, head of Green Street’s Residential Sector, tells GlobeSt.com that a rapid increase in the price of new loans is impacting institutional investors and prospective homebuyers, alike.

“Mortgage rates heading from 5% in April to approximately 7% today, should send ripple effects across the housing market and benefit rental fundamentals in the near-term,” Pawlowski said.

The 30-year fixed mortgage rates have surged nearly 400 bps in ’22.

“Home prices continued to rise earlier in the year, and at first glimpse seemed to defy the mortgage market headwinds; however, with rates now hovering around 7%, home buyers are facing a harsh new reality, which will change the tide in the for-sale market and carry ripple effects on the rental market,” Pawlowski said.

“Elevated borrowing costs continue to eat away at a household budget as individuals increasingly spend more of their incomes on shelter.

“A prospective buyer’s monthly payment on a home is up by ~60% since the beginning of ’22 when mortgage rates were low-3%.

“At current rates, households earning the median income looking to buy a median home in the country are facing spending up to 50% of their annual income on homeowner costs alone.

“Higher monthly interest payments, combined with larger down payment savings required and higher property tax payments following three years of significant cumulative price appreciation, may have a greater impact on higher-end homes.

“Making matters worse for homebuyers, the dearth of supply at the starter home price point (<$500K) should keep a relative floor on prices of homes that a first-time homebuyer could acquire, particularly as buyers trade down into lower priced homes.”

Individuals are Being Pushed Out of Owning

The National Association of Realtors’ index of home affordability for first-time home buyers recently plummeted to levels not seen since 2006.

“Values of these homes should be more resilient versus the high-end or luxury market where rates will have outsized impacts on financing costs,” Pawlowski said.

“The current cost of ownership will result in many renting longer. Expectations of lower structural turnover over the next 12 to 18 months across rental portfolios seems reasonable as individuals are being priced out of ownership.”

He said that regionally, higher mortgage rates will be most felt in higher-cost coastal MSAs versus those of the Sun Belt, as home prices as a multiple of household incomes in coastal markets stands at 7.1x versus the Sun Belt at 5.8x.”

“On average across the Top 50 MSAs, homeownership is approximately 40% more expensive than renting.”

Cost of Housing Pushing More to Renting

Clarion Partners Chief Investment Officer Jeb Belford tells GlobeSt.com, “Whether needing to either rent or own, housing is a necessity.

“And the recent run-up in for-sale housing prices and sharply higher debt costs make home ownership even more challenging.

“This will very likely push more people into the renter pool, or keep them there longer, bolstering fundamentals and rent growth for apartments and rental housing in general.

“That said, there is a risk that counterbalancing forces, such as recession-led consumption declines and job losses, may temper demand and the willingness/ability to pay higher rents, and keep more people at home with family or doubled up to save money.”