The volatility of the housing market in 2022 is far from over as it appears we may have passed the peak of existing home prices—or at least, we won’t move much higher. A recent report from Redfin shows that in July more than 15% of home sellers dropped their asking price in every major U.S. metro included in the analysis (97). Markets like Boise, Idaho, which was an extremely popular destination for urban flight from Silicon Valley during COVID, saw a near 70% drop in home prices in July.
Analytics firm Black Knight also reported a drop noting that home prices dropped by 0.77% from June to July. Even though it’s less than 1%, that is actually the largest month-over-month drop for home prices in more than a decade. Andy Walden, vice president of enterprise and research strategy at Black Knight, said “We’ve been advising for quite some time that the dynamic between interest rates, housing inventory and home prices was untenable from an affordability perspective, and at some point, something would have to give. We’re now seeing exactly that, with July’s data providing clear evidence of a significant inflection point in the market. Further price corrections are likely on the horizon as we move into what are typically more neutral seasonal months for the housing market.”
While the price corrections may not have made a significant impact in the housing market yet there are some indications that lowering prices and less competition are luring first-time homebuyers back into the mix. The Mortgage Bankers Association’s weekly mortgage application survey showed applications for a conventional mortgage were down 2%, but apps for government-backed loans rose by 4% week-over-week. First-time homebuyers generally gravitate toward government-backed loans from the FHA, VA or USDA due to lower down payment requirements.
The news is not positive everywhere, however. The severe drop in demand has really hit the new home construction market with sales down 12.6% from June to July and down nearly 30% year-over-year, according to new data from the Census Bureau. Undoubtedly, rising construction costs forcing home prices to rise is a big part of the issue. The median price for a newly constructed home went from $402,400 to $439,400 from June to July.
That price combined with higher interest rates has pushed many would-be homebuyers away from new construction. The latest Freddie Mac survey showed a 5.55% average for a 30-year fixed-rate mortgage. Freddie Mac’s economists noted similar sentiments in their release, saying “Home sales continue to decline, prices are moderating, and consumer confidence is low. But, amid waning demand, there are still potential homebuyers on the sidelines waiting to jump back into the market.”
Due to the high interest rates and home prices that are moving only fractionally lower, Fannie Mae’s Economic and Strategic Research (ESR) Group announced it is downwardly revising its forecast for mortgage origination in 2022 and 2023. The report states, “The ESR Group expects total home sales to decrease 16.2 percent in 2022. This decline represents a further downward revision from last month’s forecast of a 15.6 percent drop, as recent incoming data point to a faster slowdown in near-term sales than previously expected, despite mortgage rates having moved lower over the last few months. The latest forecast also projects total mortgage origination activity at $2.47 trillion in 2022, down from $4.47 trillion in 2021, and then a further reduced $2.29 trillion in 2023.”
**Editors note: At the time of this article’s publication deadline, Federal Reserve Chairman Jerome Powell’s speech from Jackson Hole, Wyoming had not yet occurred. We will cover the speech and its effects in the next Market Update publication.**