First American released its January 2023 Real House Price Index (RHPI), showing a 1 percent month-over-month drop in real house prices.
Housing affordability has now improved for three straight months, yet remains down 39 percent since January 2022, according to the RHPI.
“Nominal house price appreciation has slowed dramatically in response to dampened demand. Nationally, annual nominal house price growth peaked in March 2022 at 21 percent but has since decelerated by nearly 17 percentage points to 4.4 percent in January,” Mark Fleming, chief economist at First American, said. “The pandemic-era boom in house prices was broad-based, with house prices increasing by an average of approximately 42 percent from pre-pandemic to peak in the 10 markets now experiencing the lowest annual price growth. Now, as house prices adjust to the reality of higher mortgage rates, it’s becoming clear that the pace of adjustment will vary significantly by market.”
Fleming also specified the ongoing adjustment in house prices is broad-based, with nominal house prices declining in January from their recent peaks in 35 of the top 50 markets First American tracks. However, they also vary significantly by market.
“In some markets, house prices have declined from recent peaks by double-digits, while house prices in other markets have yet to decline,” Fleming said. “Of course, repeat-sales price indices, such as the one used in this analysis, are based on closed sales prices, which are a lagging indicator of price changes in the housing market because the contracts for these closed sales were set months earlier. Even so, a pattern emerges that allows us to separate markets into four categories: boom-bust; boom-no bust; no boom-bust; and no boom-no bust.”
Phoenix is cited by Fleming as a boom-bust market with house prices increasing 65 percent between February 2020 and May 2022 but declining by 8 percent since then.
“Demand skyrocketed, partially because of significant net-in migration to Phoenix over the course of the pandemic. Of the top 50 markets we track, Phoenix experienced the fourth-highest growth in population from 2020 to 2021,” he said. “Additionally, according to our calculations using data from First American Data & Analytics, more than 30 percent of all residential home sales in Phoenix in the summer of 2022 were investor purchases of residential homes as rental properties, indicating heightened investor demand. However, the share of investor purchases has declined significantly since then. The swift pullback in demand due to declining affordability is dragging down house prices.”
For a boom-no bust market, Miami jumped to the front of the pack in First American data, with house prices yet to decline from a 56 percent rise since early-2020.
“John Burns Real Estate Consulting national survey results from February indicate that the southern Florida housing market is holding up better than most of the country, in part, because of the prevalence of cash buyers, who are not deterred by rising mortgage rates, making demand more resilient,” said Fleming.
San Jose, Calif., is used as an example of a no boom-bust market, with house prices jumping by 30 percent from February 2020 to April 2022 then dropping by 11 percent.
“While San Jose prices have declined the most from peak among the markets tracked, it was in the bottom 10 markets for pre-pandemic-to-peak growth,” said Fleming. “Many of the markets with the largest price declines from peak, such as San Jose and San Francisco, are also considered ‘overvalued’ markets, meaning the median existing-home sale price exceeded house-buying power in these markets pre-bust. For San Jose in January, the housing market was still overvalued by $549,000. These larger coastal markets have long been among the most expensive, so when mortgage rates nearly doubled in a year, the pullback in demand in these already expensive markets was more pronounced.”
Fleming said New York is the best example of a no boom-no bust market.
“The pre-pandemic-to-peak growth rate in New York was nearly 32 percent, muted compared with other top markets,” he said. “House prices have not yet declined in New York, in part because there was less of a boom during the pandemic, as many residents flocked to the suburbs from the density of the city. Not as fast of a rise, not as hard of a fall.”