Where home prices are cooling off and where they aren’t

If there’s been one constant in the U.S. housing market over the past decade or so, it would have to be the seemingly unflinching ascent of home prices. Mortgage rates have shifted dramatically (in both

directions), buyer interest has alternately intensified and receded, but home prices have only known one direction: upward.

Recently, however, even this narrative has changed as home prices in some cities and regions have begun to cool. The average median home price has actually gone down from 2022 to this year, a trend that started this past February and has continued through June at the time of this writing.

While this is a nationwide trend, home price changes vary greatly from one area to another. That’s why it’s so important to work with local experts, including a local loan officer who knows what’s happening in your market.

Naturally, this comes as welcome news to legions of homebuyers—especially first-time homebuyers—who have at times felt shut out by buyers with deeper pockets and the ability to pay in cash.

Of course, this newfound reduction in home prices produces an array of questions: Why is the cooling in home prices happening now and where is it most—and least—prevalent? Is it simply a product of an overheated market that’s exhausted the high altitudes of pricing and is finally returning to earth? Let’s take a deeper look at what’s happening with home prices and try to find some answers.

What cools a market anyway?

To understand trends in the housing market, it makes sense to look at the larger economy.

Let’s revisit the upheaval in the U.S. housing market over the past 3 years. Beginning in March 2020, COVID-19 dramatically changed the way Americans relate to their living spaces and, therefore, the size and location of their home. Millions of professionals quickly transitioned to remote work and began looking for larger homes where they could acquire a home office and other amenities to suit their lifestyle.

At the same time, to reduce market volatility, keep credit flowing and limit economic damage during this unprecedented event, the federal government began purchasing mortgage-backed securities in significant quantities, causing mortgage rates to plummet and the housing market to explode. This led to higher home prices as increased competition led to a red-hot housing market.

Fast forward to today and we find ourselves in an entirely different economic climate. Both the rise in inflation and the uptick in mortgage rates (hovering around 7% since the fall of 2022) have hugely impacted the housing market and the sentiment of would-be homebuyers. When mortgage rates tick up, like they did after the Federal Reserve announced a rate increase in the beginning of August, mortgage applications go down. In June, home purchase activity was down 15.6% from the same time in 2022.

Inventory

The housing market is also incredibly reactive to supply and demand. Not enough housing? That feeds into a hot market where dwindling inventory ratchets up competition leading to higher prices. Is there a noticeable uptick in new construction? If other factors align, this can help cool the market. Available housing for purchase is a crucial “temperature” gauge.

When rates go up

One salient takeaway for homebuyers is that the recent rise in mortgage rates has catapulted the average monthly mortgage payment to $2,520 for a 30-year mortgage. That’s an increase of 49% from two years ago when mortgage rates were 2.98% and the average monthly mortgage payment was $1,694.

These are precisely the kind of financial distinctions that can sway a homebuyer. Is it any wonder that many have been holding their breath waiting for a market cool off?

Where home prices are cooling off

The key fact to know is this: While some cities and regions are experiencing a clear reduction in home prices related to the above-mentioned factors, many others have seen little or no cooling. Supply and demand have a way of imposing its own logic and there are areas—cities, suburbs and sought after zip codes—where sticker prices have stayed stuck.

We’ll look at those places in a moment, but right now let’s tick through some popular areas that have begun to cool off and become more affordable. Interestingly, the top cities for falling prices are almost all areas that saw their prices go up considerably during the pandemic.

“Those markets that got the most juiced during the pandemic—where the prices really took off—are the markets where they’re now suffering the biggest declines because affordability has been the hardest there,” says Moody’s Analytics chief economist Mark Zandi. All median listing price information comes from realtor.com.

Boise, ID

• Median listing price: $609,875
• Change year-over-year: -7.8%

During the pandemic, home prices in Boise rose 63%. This outdoor playground was popular with remote workers looking for more space and fun in the natural environment. And who wasn’t during the first couple years of lockdowns?

But now that those conditions aren’t driving up prices, Boise has lost some ground and is providing a good opportunity for those looking to buy.

Austin, TX

• Median listing price: $583,751
• Change year-over-year: -7.7%

This was another hot place to move during the pandemic, and the capital of Texas is boosted by also being a hub for tech companies. The prices per square foot for homes in Austin shot up a shocking 75% during the pandemic. But now those prices are coming down, which is likely welcome news for all of those residents who want to keep Austin weird.

Myrtle Beach, SC

• Median listing price: $366,075
• Change year-over-year: -7.3%

Vacation areas, like Myrtle Beach—situated on the Atlantic Coast—became popular places to buy during the pandemic. But with fewer able to work remotely from a permanent vacation spot, the demand for homes in this area has dropped, as have prices.

Phoenix, AZ

• Median listing price: $529,450
• Change year-over-year: -5.6%

Phoenix has long been one of the fastest growing metro areas in the country, and the speed it grew over the last few years pushed home prices higher. But Phoenix has the ability to keep growing. Warm enough for home construction to keep chugging along year-round, and with plenty of land available in the Valley of the Sun, low inventory isn’t as much of issue here as it is in other parts of the country. And that has allowed home prices to come down from their recent highs.

Sarasota, FL

• Median listing price: $549,900
• Change year-over-year: -4.7%

Another vacation destination that benefitted from the work from home crowd over the last few years, Sarasota has lost some of the helium that was pushing prices higher. But with plenty of homes for sale, it’s a great spot for those looking for options.

Salt Lake City, UT

• Median listing price: $635,000
• Change year-over-year: -4.0%

Salt Lake City is an outdoor lover’s paradise with a healthy amount of tech jobs, two qualities that proved popular with homebuyers during the pandemic. Now that the frenzy of those heady days have died down a bit, home prices have levelled off, maybe even dipping slightly.

Pittsburgh, PA

• Median listing price: $238,250
• Change year-over-year: -3.9%

The only city in the Northeast on this list, Pittsburgh is also the city with the lowest median listing price included here as well. That’s due in part to the fact that Pittsburgh also features smaller homes than the metro areas out West, with a median home size around 1,600 square feet.

The Steel City didn’t see as much price appreciation as others, but the downturn seems to be due to the housing slowdown we’re seeing across the country. But that makes it a good option to finding potential value on the homes for sale there.

Winston-Salem, NC

• Median listing price: $345,899
• Change year-over-year: -3.6%

Warm temps and tech jobs helped drive Winston-Salem home prices up over the last few years. Still a robust housing market, the area is seeing a shift in buyer preference, with more folks scooping up cheaper, smaller homes and eschewing the larger, more expensive homes that had been in vogue recently.

Sacramento, CA

• Median listing price: $662,875
• Change year-over-year: -3.4%

Sacramento lies within the interior of the state not too far from the Nevada border and has seen its housing market undergo a cooling in recent months as mortgage rates have continued to climb. It’s a tradeoff for sure, but with an increase in supply and a decrease in competition, many houses are being sold below the initial asking prices—which is good news for homebuyers.

Chicago, IL

• Median listing price: $376,000
• Change year-over-year: -1.1%

The Windy City, home of Guaranteed Rate Affinity, has seen a big shift in buyer preference based on neighborhood. Remote work has cooled off the housing market in the city center, those neighborhoods near the iconic Loop, as that part of town has become downright sleepy. While home prices in the city in general were slightly down, the majority of the drop came from those downtown neighborhoods.

Metro regions avoiding the chill

So where is it good to be a seller? As mentioned earlier, there are plenty of regions that have yet to see home prices cool down in a significant way. Interestingly, the metro areas that are seeing home prices rise are mainly in the Midwest and the South.

• Davenport, IA
• Montgomery, AL
• Wichita, KS
• Tulsa, OK
• Youngstown, OH
• Minneapolis, MN
• McAllen, TX
• Harrisburg, PA
• Little Rock, AR
• Knoxville, TN

These areas have relatively strong local economies, home prices that are less than the national average in terms of price per square foot. Add to that the fact that there aren’t enough homes for sale in these metro areas and you have a recipe for a warming local housing market.

Work with a local expert

Regardless of current temperature, the housing market is fluid, and we should always expect change as demand fluctuates, inventory increases and sellers take the initiative to reduce asking price to better accommodate today’s homebuyers and increase the likelihood of an expeditious sale. That’s why it’s so important to work with local experts, like a loan officer who understands what’s driving home prices in your market.

To gain additional insight into conditions on the ground, it’s useful to reach out to a trusted lender who can walk you through today’s rates and explain the value of different loan terms, including 30-year fixed rate mortgages, 15-year fixed-rate mortgages and adjustable rate mortgages (ARMs). Depending on your financial resources and long-term goals, you can find a loan that works for you today–regardless of market volatility.

Source: By Craig Wales on 8/28/2023