The Federal Reserve targets home prices to curb inflation. But only certain markets seem to be responding – revealing the imprecision of an interest hiking toolbox.
Housing prices fell in January, but at vastly different speeds coast to coast. A stark split in the rate of decline laid bare the limitations of the Federal Reserve’s ability to target inflation through real estate.
Nationwide, seasonally adjusted home prices fell by 0.2% month over month, down 3 percent from its peak in June, according to the monthly S&P Case-Shiller Index released on Tuesday. Home prices across the country still rose 3.8 percent compared to January last year, but the year-over-year increase slowed from December, when prices were up 5.6 percent.
The correction in real estate prices is the direct result of higher interest rates, which the Federal Reserve has raised nine times in the past year – driving up mortgage rates to 6.48 percent in January and making it more expensive to purchase a home.
But the breakdown in housing prices by city paints a very different picture of price polarization.
During the pandemic, western cities in California, Oregon, and Washington saw some of the highest home price hikes nationwide. Now, these markets are experiencing the greatest recoil.
Prices in San Francisco fell by 7.6 percent as compared to January 2022, as demand for homes dwindles. Seattle, Portland, and San Diego also experienced large year-over-year price declines, bucking national trends.
In stark contrast, house prices in Miami surged by 13.8 percent year over year, with similar double-digit increases in Tampa and Atlanta. In all three cities, price gains appear to be slowing, but at a snail’s pace compared to the rest of the country.
The widening geographic disparity can be explained by starkly different economic environments nationwide.
“The correction in home prices in the west is more severe than the rest of the country because affordability was more stretched prior to the pandemic,” said Bill Adams, the senior vice president and chief economist at Comerica Bank. “The demand diminishes faster, especially as the cost of living is squeezing out middle income households.”
The impact of inflation has affected Americans in all areas of the country, and in some regions that doesn’t seem to have had much of an effect on demand for housing. But the tech sector, which is disproportionately located in cities like San Francisco and Seattle, has not weathered financial uncertainty as well as other industries, where jobs have mostly remained resilient to rising interest rates.
The tech industry had billions of dollars worth of growth during the pandemic, as workforces nationwide became more reliant on technology amidst the switch to remote work. But that boom quickly turned to bust: in 2022 and 2023 alone, the tech industry laid off 121,205 workers, according to a layoffs tracker, a website that tracks layoffs through public company announcements. Amidst this downturn, two prominent banks – Silicon Valley and Signature Bank – serving the tech and crypto industries collapsed.
“The economies on the west coast are more tied to the tech industry,” Adams said. “And so contractions in that sector are passing through to the housing market.”
By contrast, persistent demand in the east coast, and Miami in particular, has buoyed surging home prices for an increasingly limited housing stock. This has been good news for homeowners and real estate agents, but has created an affordability crisis for everyone else.
On a daily basis, the Miami-Dade Economic Advocacy Trust partners with local government to subsidize down payments for Miami’s Black first-time buyers. In response to 18.4 percent annual increases in home prices, the Economic Advocacy Trust more than doubled the available subsidy from $14,000 to $28,500.
“Miami is the epicenter of the housing crisis,” said Zachary Rinkins, the public information officer at the organization. “We offer an essential service to the low to moderate prospective home buyers, who need a competitive advantage in an increasingly more expensive and increasingly more challenging environment.”
Rinkins and his team have invested more and more resources into outreach, and have seen a noticeable increase in applicants.
Neither the east or west coast will be spared from the uncertainty in the coming months. Only one month ago, it looked all but certain that the Federal Reserve would continue to keep interest rates higher for longer. Economists had no reason to believe that the housing market wouldn’t continue to heed to federal pressure.
But some have said financial instability could tighten credit lines and compound the effects of raised interest rates on the housing market.
Others have speculated that banking turmoil has laid bare other vulnerabilities in the sector, making it unclear whether the Federal Reserve will be forced to capitulate on its stern promise to curb inflation.
Ultimately, much is unknown.
“Contagion really hinges on perception, much more than any reality of risk of insolvency,” said Paul Adornato, Head of Industry Relations and Professional Education at MIT’s Center for Real Estate. “The Fed has really gone out of their way to reassure markets, but no one wants to be left holding the bag.”