Housing markets along the West Coast and across the Rocky Mountain region, including Denver, are the most vulnerable to price declines in the coming months as both sellers and buyers readjust their expectations.
“The market is clearly turning,” Lawrence Yun, chief economist with the National Association of Realtors, told journalists gathered for the National Association of Real Estate Editors conference in Atlanta on Thursday.
San Jose, California home prices are already down 10% from their recent peak, said Selma Hepp, an economist with CoreLogic.
That softness could spread throughout a region that benefitted from strong tech hiring and large home price gains during the pandemic and in the years leading up to it.
Yun predicts U.S. home price gains will go from double-digit increases earlier this year to flat by next year. But some areas will continue to see price gains, while others, mostly in the West, will see price declines.
Hepp’s list of the states most vulnerable to home price declines includes California, Washington, Oregon, Idaho, Utah and Colorado.
Yun said the lack of affordability, which is at the 2006 lows reached before the housing crash, is a major contributor to the difficulties that the market is now facing.
At the start of the year, mortgage rates on a 30-year loan were at 3.3% and now they are above 7%, according to the Mortgage Bankers Association.
Yun said it has been at least 40 years since the market has seen mortgage rates rise so quickly. Back then mortgage rates reached much higher levels, in the mid to high teens, as the Federal Reserve fought to bring inflation under control
But in percentage terms, the increase this year has been huge and rapid, especially for new homebuyers who have seen rates double or nearly double since they signed contracts.
Borrowing a term used in stock-market investing, Yun said that 7% on a 30-year loan represents “resistance” or a line of defense. He expects that line will hold, but if it doesn’t, then the next point of resistance on rates is around 8.5%.
“It will be another big shock,” he said if rates bust through.
Several things should prevent a repeat of the 30% decline averaged nationally in home prices during the last housing downturn. There were three to four times as many homes available on the market back in 2006 as there are now. That inventory glut made it difficult to sell a home and contributed to sharp price declines.
About 95% of those holding a mortgage now have a rate below 5%, which creates a strong “lock-in” bias among existing homeowners, said Hepp. Someone sitting on a 3% mortgage will be hard-pressed to trade that in for a 7% mortgage unless they absolutely have to, further limiting inventory.
Stricter lending standards in the past decade should limit the number of at-risk borrowers forced to sell into a declining market. And if people do need to sell, U.S. homeowners have accumulated $29 trillion in equity or about 70% of the underlying value of their homes, said Daniel Hale, chief economist at Realtor.com.
“Homeowners are in a much better position to weather what is ahead,” Hale said.
As for buyers, more of them are being priced out of the market, but they aren’t giving up completely.
Strong demand from millennials in their prime homebuying years should support the market for the next five to seven years, setting the stage for a strong rebound when affordability improves, predicted Lisa Sturtevant, chief economist at Brighton MLS, a multiple-listing service covering six mid-Atlantic states and the District of Columbia.
“Seven percent feels scary. People are sitting back, but they are not out of the game,” she said.
Some buyers will downsize what they seek to purchase, and others will relocate to lower-cost markets where they can get more value for their money, a shift made easier by the greater availability of remote work arrangements. Many will wait in the background, ready to pounce once affordability improves, Sturtevant said.
But expectations will need to adjust, for both sellers and buyers alike.
“That is the scary part, how much we have to adjust our expectations,” Hepp said.
