Signs reveal that the economic slowdown primarily fueled by rising interest rates has begun spilling into the real estate market. According to mortgage data analytics firm Black Knight, housing prices dipped by more than 75 basis points in July versus June, a monthly reversal that has not occurred in three years.
The decline represents the steepest drop in property prices in over a decade. According to CNBC, this decrease in housing prices is a shift from the dynamic that persisted throughout the pandemic when housing demand was robust, property prices rose, and mortgage rates were historically low.
In addition, Americans are experiencing their lowest housing affordability rates in three decades, as more of their income must be earmarked for real estate expenses. For example, the Black Knight report reveals that homebuyers must set aside nearly one-third of their income to purchase the average property with a 20% down payment and a 30-year loan. The affordability rate has climbed 13 percentage points higher than pre-pandemic levels, with the 25-year average hovering slightly below 24%.
According to Black Knight’s Andy Walden, vice president of enterprise research and strategy, it was only a matter of time before “something had to give” amid “the dynamic between interest rates, housing inventory, and home prices” being “untenable from an affordability perspective.” July proved to be the inflection point, the latest housing data reveal. According to Walden, there is more pain to come ahead of a seasonally soft period for real estate.
“Further price corrections are likely on the horizon as we move into what are typically more neutral seasonal months for the housing market,” Walden said.
Moody’s has echoed that sentiment. The analytics firm’s chief economist, Mark Zandi, warns that a contraction in the housing industry would be more severe than previously expected. He forecasts housing prices will “shift” in the range of zero and 5% in the coming year as long as an economic recession is averted. If a recession hits, U.S. real estate prices could fall by 10%, Zandi predicts.
Moody’s identified several overvalued housing markets, such as Boise, ID; Charlotte, NC; and Austin, TX, all of which are the most vulnerable to potential price declines in a housing market that “rolls over.”
Not all housing prognosticators see the glass as half empty. According to the National Association of Realtors (NAR), a decline in home prices is nothing more than a market adjustment, considering prices have risen close to 36% since the health crisis started.
For this year and next, the NAR forecasts prices will be up 11% and 2%, respectively. The association points to robust demand in the housing market thanks to strong employment rates and a housing supply they describe as “inadequate.”
While property prices are weakening somewhat, U.S. foreclosures are holding their own, another report by Black Knight reveals. Serious delinquencies, representing homes that are at least 90 days past due but have not reached foreclosure status, declined in July vs. June. Seriously delinquent loans have fallen from over 100,000 in March to 58,000 as of July. However, the Black Knight report reveals that the national delinquency rate still increased in July to 2.89%, up 1.98% versus June, fueled by a 4% jump in early-stage delinquencies.