Housing affordability continued its rapid decline in August, as First American’s Real House Price Index rose 49 percent year-over-year.
“The ongoing and swift decline in affordability was driven by a 15 percent increase in nominal house prices and a 2.4 percentage point increase in the 30-year, fixed mortgage rate compared with one year ago,” First American Chief Economist Mark Fleming said in a release. “As affordability wanes, would-be buyers are pulling back from the market, prompting annual house price appreciation to fall from its recent peak.”
While house price appreciation in the top 50 markets has slowed, some have cooled faster than others, Fleming noted.
“For example, the market with the strongest deceleration was Sacramento, Calif. Annual house price appreciation in Sacramento peaked in July 2021 at 23.5 percent, but has since slowed to 4.6 percent, a 19-percentage point difference,” he said.
The market with the smallest difference was New York, where house price appreciation reached 13 percent in May 2021 and was 11.6 percent in August 2022. The market with the slowest annual pace of appreciation in August was San Francisco at 1.1 percent, way down from its July 2021 pace of 17.6 percent.
“However, some markets continue to see strong house price growth,” Fleming said. “The market with the fastest pace of appreciation in August was Miami at 30 percent, which is only 3 percentage points below its peak of 33 percent in May of 2021.”
Although house price appreciation has slowed in all the markets tracked by First American, the deceleration has been more dramatic in areas that experienced the strongest peak appreciation rates. Price appreciation has been most resilient in parts of Florida, including Miami, Tampa, Orlando, and Jacksonville, where peak house price growth rates were near or above 30 percent. Their fall has not been as severe as in other markets.
“While house prices historically have been resistant or slow to decline, a dynamic referred to as ‘downside sticky,’ the recent decline in affordability has forced sellers to adjust their price expectations,” Fleming said. “Homeowners have to resist the recency bias of the hot 2021 market and adjust to a market where buyers are facing mortgage rates approaching 7 percent. As a result, it’s no surprise that price cuts are becoming more common.”
Slowing price appreciation is expected to continue as the market adjusts to the decline in affordability and the pandemic-era sellers’ market turns toward buyers.
“Double-digit house price growth was not sustainable in the long run, so what went up so quickly, is now coming down,” Fleming said. “However, don’t expect a housing bust like the mid-2000s, as lending standards in this housing cycle have been much tighter and homeowners have historically high levels of home equity, so there likely won’t be a surge in foreclosures.”