Home price trends depict a cooling housing market

Even with another annual surge of over 20%, the pace of home-price growth eased in May and experts anticipate even further moderation over the next year. 

Home prices rose by 20.2% year over year in May, slowing from a pace of 20.9% one month earlier, according to CoreLogic’s Home Price Index, which is based on analyses of public record, servicing and securities real-estate databases. The monthly increase in price levels also came in lower, at 1.8%, compared to 2.6% from March to April.

Fear of missing out on a potential home likely helped maintain elevated price growth throughout much of the spring, but activity ebbed as rates increased at a pace few anticipated. The market has sustained a pace of annual cost increases at 10% or more for 16 consecutive months.

“Slowing home-price growth reflects the dampening consequence of higher mortgage rates on housing demand, which was the intention,” Selma Hepp, deputy chief economist at CoreLogic, said in a press release. 

In an effort to curb the months-long surge in inflation and risks of an overheated economy, the Federal Reserve announced a 75-basis-point hike in the rate banks use to lend to each other in mid May, subsequently driving up mortgage rates as well. Rising rates are also taking a larger cut out of consumer incomes.

The combined effect of elevated rates and high prices has led some potential homebuyers to reconsider purchases, leading to the slowdown in upward price movement. Early real estate data from May, including reports of a number of sellers reducing their asking prices, provided early signs of a cooling market. 

“With monthly mortgage expenses up about 50% from only a few months ago, fewer buyers are now competing for continually limited inventory,” Hepp said. CoreLogic expects continued sluggish demand to contribute to a rapid deceleration of price growth, down to 5% by this time next year. 

But the trend could benefit some, Hepp said. “The normalization of overheated buying conditions should bring about more of a balance between buyers and sellers and a healthier overall housing market,” she said.

As they did in April, Tampa, Florida, and Phoenix led all metropolitan areas in annual price appreciation in May, with home costs increasing by 33.4% and 28.7%, respectively. On a state basis, Florida, Tennessee and Arizona topped the list, with year-over-year gains of 33.2%, 27.4% and 27.3%.

However, one consequence of the past year’s extremely hot housing market was the addition of more markets to a list of areas now deemed overvalued, according to researchers at two Florida universities. In its report, CoreLogic found cities in Washington state and Idaho landing at the top of cities most at risk of price declines.