Only in Austin, Texas are home prices sinking

As the spring homebuying season comes to an end, there are distinct signs of the housing market reheating from a home price perspective. The lack of inventory drove home prices up, challenging potential buyers, Black Knight pointed out in its monthly mortgage origination report. 

The reheating is widespread with more than half of the 50 largest U.S. markets seeing prices at or above 2022 peaks. On a seasonally adjusted basis, Black Knight’s home price index hit a new record high in May, having now fully reversed the correction in home prices seen late last year. 

Although the backward-looking annual growth rate sat at 0.1% in May, the exceptionally strong 0.7% month-over-month gain would equate to an annualized growth rate of 8.9%, Black Knight’s mortgage monitor report noted. 

That would mean the annual home price growth rate would remain at or near 0% for only a short time before inflecting and trending sharply higher in coming months, Andy Walden, Black Knight’s vice president of enterprise research, said. 

While prices are still well below peak levels across the West and in many pandemic boom towns, price firming in recent months has begun to close those gaps. 

Austin, Texas, is a notable exception. Inventory in Austin continues to run above pre-pandemic levels, putting downward pressure on prices, which have fallen to -13.8% below peak, the largest gap of any market. 

Just eight of the top 50 markets are currently more than 5% below their 2022 peaks.

The price jumps for homes comes down to the lack of inventory, the report pointed out. 

For-sale listings deteriorated in 95% of major U.S. markets in 2023. Active listings are still down more than 50% from pre-pandemic levels.

“New construction starts and completions were both strong in May, which is welcome news. However, most projects underway in the month were 5+ multi-family units, as opposed to single-family residential units,” Walden said. 

Single family residential units account for just 40% of the total number of projects underway. 

“As it stands, housing affordability remains dangerously close to the 37-year lows reached late last year, despite the Federal Reserve’s attempts to cool the market. The challenge for the Fed now is to chart a path forward toward a ‘soft landing’ without reheating the housing market and reigniting inflation,” Walden noted.

The same lever used to reduce demand – which is raising rates – has made housing unaffordable across major markets and resulted in significant supply shortages by discouraging potential sellers unwilling to list, further strengthening prices, Walden explained.

As of June 22, with 30-year rates at 6.67%, the principal and interest (P&I) payment needed to buy the median-priced home rose to $2,258, marking the highest payment on record.

Factoring in current income levels, only about 35.7% of median household income makes the average P&I payment.

It would take a 30% drop in home prices to get back to normal affordability, according to the report. Alternatively, if prices stayed the same and rates fell to 5%, it would take 19% income growth to get the market back to normal affordability. 

“At this point, even if rates come down, but not so sharply as to entice potential sellers out of their sub-3.5% mortgages, it could risk a widespread reheating of home prices across the U.S,” Walden said. 

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