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House Prices Fall as Rate Hikes Push Buyers to Sidelines

Soaring mortgage rates and elevated home prices have deterred buyers, forcing sellers to lower their expectations.
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Signs are mounting that home prices have peaked, as soaring mortgage rates have deterred buyers, forcing sellers to lower their expectations.

For example, the S&P CoreLogic Case-Shiller Home Price Index dipped 0.3% in July from June, the largest monthly decline since November 2014.

And now Realtor.com has reported that 19.5% of home listings cut their prices in September. That’s the highest portion this year, almost doubling the 11% total from September 2021.

As for the Case-Shiller report, it did show that home prices soared 15.8% in the 12 months through July. But that’s still a slowdown from 18.1% in the 12 months through June. The 2.3 percentage-point difference is the largest deceleration in the index’ history going back to the 1987.

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

“As the Federal Reserve continues to move interest rates upward, mortgage financing has become more expensive, a process that continues to this day.”

15-Year High for Mortgage Rate

The 30-year fixed mortgage rate averaged 6.7% in the week ended Sept. 29, according to Freddie Mac, the highest since 2007. That compares to 6.29% a week earlier and only 3.01% a year ago.

“The uncertainty and volatility in financial markets is heavily impacting mortgage rates,” Sam Khater, Freddie Mac’s Chief Economist, said in a statement.

The rate rise has hammered home buyers. The average monthly cost of a typical mortgage soared by about $1,000 over the last year, according to economist David Doyle of Macquarie’s, as cited by Bloomberg.

That increase, which constitutes 15% of median household income, is the biggest climb since 1981.

Home buyers who want to spend $2,500 a month can now buy a house costing $476,425. In early 2021 you could have snagged a $758,572 house for that monthly payment, according to Bloomberg economist Michael McDonough.

Buyers and Sellers Both Sidelined

High mortgage rates are keeping both buyers and sellers on the sidelines, according to real estate brokerage Redfin.

Buyers are reluctant because they can’t afford elevated home prices and high mortgage rates.

“Sellers, hesitant to list their homes into an environment with diminished demand, are also motivated to stay put, because they don’t want to give up their own relatively low mortgage rates,” Redfin said.

The Fed’s interest-rate increases are “necessary to fight inflation, but come with some painful side effects–especially for homebuyers,” said Redfin economist Chen Zhao.

Existing-home sales fell for a seventh straight month in August, dropping 0.4% from July and 19.9% from a year earlier, according to the National Association of Realtors. The annualized sales pace was the lowest since May 2020, early in the pandemic.