For the past two years, we have seen U.S. home prices gain by at least 10% on a month-to-month basis. As of the recent data reported for the month of October 2022, this is no longer the case. In fact, the two agencies reporting on home price growth are in agreement as well. The S&P CoreLogic Case Shiller national home price index increased by 9.2% in October. This figure is down from the 10.7% increase seen in the month of September. In addition, the Federal Housing Finance Agency (FHFA), which oversees U.S. mortgage-finance entities Fannie Mae and Freddie Mac, also reported their findings for home prices. According to their latest report, annual home price growth slowed to 9.8% in October from the 11.1% gains seen in September.
A strategic slowdown
When analyzing the housing market, you need to take a step back and look at the economy as a whole. You don’t need to read this article to realize that the cost of virtually everything has risen uncontrollably over the past year or two. Due to this out-of-control inflation, the Federal Reserve has reacted quite aggressively in order to tame inflation. In doing so, they have risen interest rates at an extremely rapid pace. Unlike other parts of the economy, the housing market reacts in virtually real-time to rising interest rates. With this said, we have seen millions of Americans priced out of the housing market, which has led to the significant slowdown that we are seeing now. The other thing to keep in mind is that the Federal Reserve is attempting to slow down Americans’ spending overall. A home purchase is likely the largest expenditure for most Americans, therefore it makes sense to shut down this segment of the economy first.
The 30-year fixed mortgage rate breached 7% in October 2022 for the first time since 2002. In other words, mortgage rates have more than doubled in a span of just nine months. Therefore, it should not at all be surprising that the housing market is in a holding pattern as compared to the past few years.
In closing, it should be noted that most economists do not see another crash of the housing market like we saw during the financial crisis from March 2007 through April 2012. In addition to much stricter lending standards, the current supply of homes for sale on the market is substantially lower than what we saw during those years. This limited inventory of homes for sale should keep a floor on housing prices overall. Recently, the National Association of Realtors® projected that prices for existing homes should remain more or less flat in 2023. Of course, as The Federal Reserve continues to tighten the financial conditions, we can expect the housing market to continue to slow down.
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