House Prices Decline, but Equity Buffers Remain Robust, According to First American Real House Price Index

“In September 2022, the RHPI jumped up by 60.6 percent on an annual basis. This rapid annual decline in affordability was driven by two factors – a 13.5 percent annual increase in nominal house prices and a 3.2 percentage point increase in the average 30-year, fixed mortgage rate compared with one year ago. Even though household income increased 3.1 percent since September 2021 and boosted consumer house-buying power, it was not enough to offset the affordability loss from higher mortgage rates and fast-rising nominal prices,” said Mark Fleming, chief economist at First American. “As affordability wanes and prompts buyers to pull back from the market, nominal house price appreciation has slowed. Nationally, annual nominal house price growth peaked in March at nearly 21 percent but has since decelerated by approximately 7 percentage points to 13.5 percent in September.

“But real estate is local, and there are markets where annual price growth isn’t just slowing, but prices are falling from recent peaks,” said Fleming. “Nominal house prices in many markets are poised to fall further as the hot sellers’ market of the pandemic turns in favor of buyers, but not all that was gained in the pandemic will necessarily be lost.”

Not All that was Gained Will be Lost

“The pandemic housing market was unprecedented in multiple ways. The housing market was already strong prior to 2020, yet the pandemic redefined the role of a home, creating a surge in demand. As work-from-home became the new normal, a house was no longer just a dwelling or a vehicle for wealth creation, but also an office, a classroom, a daycare and even a gym. The broadening role of the home in American life, coupled with record-low mortgage rates and limited housing supply, powered the housing market to multiple records during this unprecedented time -- the fastest annual house price appreciation, the lowest days on market in the history of record-keeping, and a near-record annualized pace of sales,” said Fleming. “Yet, the pandemic housing market was the exception, not the norm. Double-digit house price growth was not sustainable in the long run. As the saying goes, what goes up, must ‘eventually’ come down. Sellers may be anchored to yesterday’s prices, but buyers won’t buy unless sellers adjust prices down to meet the affordability-constraining reality of higher mortgages rates. Sellers are beginning to recognize this and price cuts are becoming more common.