US Home Prices See Sharp Decline

AMSTERDAM, Netherlands — U.S. home prices recorded a second consecutive month-over-month decline in August, something that hasn’t happened since 2012, according to an analysis by the ING Group.

Demand is weakening as mortgage rates surge while housing inventory for sale is on the rise, meaning further large price falls are probable, said James Knightley, chief international economist for the Dutch multinational banking and financial services corporation. 

While that’s bad news for new homeowners, it can help knock broader inflation down more quickly, Knightley wrote.

Home prices nationally are up more than 40% since the start of the pandemic as huge fiscal and monetary stimulus fueled demand for homes while working from home also opened more alternatives of where to live. 

At the same time, supply was limited with new construction slow to catch up. However, the market is now entering a very different environment, Knightley said.

The July S&P Case Shiller house price report recorded the first month-on-month fall in over 10 years and now there has been a second. 

After July’s 0.7% month-over-month drop they fell 1.3% in August in the 20 major cities, taking the year-on-year rate of appreciation down to 13.1% from 16%. 

Every city experienced a price fall, but the biggest decline was on the West Coast with Seattle, Washington, down 3.9% month-over-month after a 3% fall in July while San Francisco fell 4.3% month-over-month after July’s 3.5% decline. 

New York, Cleveland, Ohio, and Chicago, Illinois, saw much smaller falls, but then again prices didn’t rise as rapidly on the way up, Knightley said.

Mortgage rates have more than doubled since the start of the year to nearly 7%, making it much more challenging to meet monthly mortgage payments — the typical monthly mortgage payment on a 30-year fixed rate mortgage is now above $2,600. 

Meanwhile, the rising cost of living and falling equity markets amid a general lack of affordability have made it more challenging to save enough for a down payment for first time buyers, which Knightley called “the lifeblood of the market.”

At the same time housing supply is on the rise with the stock of new homes for sale up 50% since February while the number of existing homes for sale is up 64% since the October 2020 low. 

“This means we are moving from a market that was suffering from significant excess demand to one where there is a risk of modest excess supply dominating the story over the coming year, especially if recessionary forces result in rising unemployment,” Knightley wrote.

The median price for an existing home is currently 5.3 times the median level of household incomes, higher than even at the peak of the housing boom of the mid-2000s. 

“To get us back to the long-run average house price-to-income ratio of around four on a three-year horizon would imply prices falling peak-to-trough by around 20% while assuming nominal incomes rise 3% in each year,” Knightley said.

One positive note by the economist is that over the longer term this should help to get broader inflation measures lower with CPI getting close to 2% by end-2023 given the relationship with the shelter components that go into CPI.

Knightley said there is normally a lag of 12-14 months between turning points in housing prices and the shelter CPI components since rents typically change only once a year so there is a slow response while perceptions of housing costs also take time to change.

However, evidence from rent.com and realtor.com suggest actual rents are already trending lower, he said.

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