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Home Prices Ease as Mortgage Rates Rise

Real Estate

Home for sale | Image by Shutterstock

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U.S. real estate prices are cooling off in the face of soaring inflation and rising interest rates.

The pendulum on property values has shifted as home prices begin to fall. The S&P Case Shiller Index climbed by 15.8% in July vs. the year-ago period.

However, on a month-over-month basis, home prices are getting more attractive for homebuyers. Between June and July 2022, U.S. home prices cooled at their fastest pace in the index’s history, from an increase of 18.1% to a rise of less than 16%, respectively.

Home prices in major metro areas, including Boston and New York, also eased in July vs. June, with the 10-City Composite Index rising 14.9% vs. the year-ago period compared with a 17.4% spike in June.

Meanwhile, the broader 20-City Composite Index, which comprises additional cities such as Detroit and Seattle, advanced 16.1% in July 2022 vs. the year-ago period and compared with a steeper 18.7% increase in June 2022.

On a seasonally adjusted basis, the 20-city index dropped 0.4% in July 2022 vs. an increase of 0.4% in the previous month. The 20-City Composite Index had not experienced a monthly drop since 2012, the year when the real estate crash of the Great Financial Crisis came to a close.

Craig J. Lazzara, managing director at S&P DJI, stated in a press release, “Although U.S. housing prices remain substantially above their year-ago levels, July’s report reflects a forceful deceleration.”

While the trend across the U.S. is easing home prices, Dallas still finds itself on the higher end of the value spectrum. For example, among the regions in the 20-City Composite index, Tampa, Miami, and Dallas experienced the highest home price increases in July 2022, at 31.8%, 31.7%, and 24.7%, respectively, all compared with the same month last year.

However, this trio of cities also saw smaller price hikes in the 12 months that ended July 2022 vs. the same period in 2021.

While the direction of property prices tends to be seasonal in nature, the most recent easing is more dramatic than usual. The National Association of Realtors revealed a similar trend to the S&P Case Shiller Index in which home prices cooled in July vs. June 2022 at a pace three times more than the average historical easing.

As reported on September 27, the average monthly mortgage payments are up approximately 70% vs. year-ago levels.

The real estate market is changing quickly amid changes in demand. Prices are no longer where they hovered just a few short weeks ago. Fueling this paradigm is an inflation-ridden economy in which consumers have difficulty affording homes while mortgage rates continue to inch closer to 7%.

Meanwhile, the Federal Reserve continues its aggressive monetary policy as it seeks to thwart inflation, most recently raising interest rates by 75 basis points for the third time in as many meetings.

An analysis by S&P shows that as long as rates are moving higher, mortgage rates will remain pricey, fueling a dicey macroeconomic environment that could hasten the falling home price trend for the foreseeable future.

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