Economists predict that home prices declined year over year in February, ahead of the monthly Case-Shiller Report set to release tomorrow morning. But uncertainty lingers amidst changing seasons, regional divides and an otherwise resilient labor market.
The Federal Reserve is Doing its Job
Economists believe that housing prices decreased in February, which would mark the first year over year decline in home prices since 2012. If true, falling prices would indicate that the Fed’s interest rate hikes are working exactly as intended – at least in the housing market – offering some optimism about the prospects of avoiding a recession. Although a year over year decrease in prices would be the first in over a decade, it would not be a departure from recent trends. In the seven months leading up to February, housing prices fell month over month as the result of surging mortgage rates, which rose to 6.88% in February from 3.22% at the beginning of 2022.
Since the first interest rate hike last year, the Fed has relied on declining home prices to bring down inflation. Shelter prices, which includes both rent and new homes, contributed to 60% of overall inflation (without food and energy), according to the Bureau of Labor Statistics.
Sellers Won’t Sell
Some experts warn not to celebrate the Fed’s progress just yet, pointing to a contraction in the number of available homes listed on the market as a potential offset to dampened demand. Under normal circumstances, an unseasonably warm February might’ve led to a surge in homeowners looking to sell. But according to the National Association of Realtors, sales of previously owned homes were down 22.6% from a year earlier, despite a 14.8% increase from January. Pre-owned homes make up the bulk of the housing market. Steep mortgage rates appear to be dissuading sellers – who don’t want to give up favorable rates – from selling, putting a further strain on an already limited housing stock. The decline in housing costs driven by decreasing demand could potentially be counterbalanced by an unwillingness to sell among existing homeowners.
As nationwide data reveals a plodding decline of home prices, the regional breakdown paints a more complicated picture. Where prices in cities on the West Coast have plummeted year over year, Southeastern cities like Miami and Atlanta were still seeing sizable, albeit declining, annual increases in January. Economists believe that this is in part due to the resilience of the labor market in industries – like hospitality and construction – that have been flourishing in Southern metro areas. By contrast, cities like San Francisco and Seattle have a high saturation of workers in the tech and finance industries, which have been hit particularly hard by federal monetary policy. These were also the cities with the largest increases in home prices during the pandemic, creating the most room for dramatic price correction.
Slow Home Construction
Single-family home construction declined for five months straight ahead of February, according to the federal U.S. Census Bureau. Much like sellers, builders were spooked by tightening credit markets and declining home prices – contributing to a reluctance to break new ground. Leading up to February’s release, declining construction meant a continued constraint on supply, and an unabating upward pressure on prices.
But construction appeared to turn a corner in February, which saw a 9.8% monthly increase in single-family home construction, and a 13.2% increase in building permits. Similarly, the March jobs report revealed that the construction industry added 24,000 jobs. Although that is unlikely to affect February’s numbers, it does give some housing economists reason to believe the nation is approaching a bottom to price declines.
Foreclosures? Market Collapse? Probably not.
Speculation about recession inevitably provokes memories of the 2008 housing crisis, where predatory lending artificially spiked home prices and eventually led to a devastating crash. But this time around, the historic surge in demand for homes during the pandemic was largely driven by low long-term mortgage rates. Crucially, homeowners who bought in the past couple of years are still benefiting from cheap financing and a robust labor market. With inventory constrained by reluctant sellers and hesitant builders, homeowners will likely maintain the value of their homes for the foreseeable future.