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US home prices rose steadily in July, but the current market is showing signs of slowing.

The market’s movement is due to the rise in mortgage rates, which marginalizes more potential buyers.

Home prices rose 15.8% year over year in July, according to the US National S&P CoreLogic Case-Shiller Home Price Index.

The jump is smaller compared to June’s 18.1% growth.

However, the 2.3% gap between the two months makes it the biggest downturn in the index’s history.

Prices drop

On a monthly basis, prices have fallen 0.2% since June, the first monthly decline for the national index since February 2012.

Craig J. Lazzara, director of S&P Dow Jones Indices, commented on the situation, saying:

“Although US housing prices remain substantially above their year-ago levels, July’s report reflects a forceful deceleration.”

Twenty cities reported lower price increases in July than in 2021.

Tampa was able to make the biggest gains, as house prices rose 31.8% in July from the previous year.

Miami followed with an increase of 31.7% and Dallas with 24.7%.

“As the Federal Reserve continues to move interest rates upward, mortgage financing has become more expensive, a process that continues to this day,” noted Lazarra.

“Given the prospects for a more challenging macroeconomic environment, home prices may well continue to decelerate.”

A similar trend in July house prices was observed in a report by the Federal Housing Finance Agency on Tuesday.

The FHFA House Price Index reported that house prices rose 13.9% year-on-year in July.

However, they fell 0.6% from the previous month.

According to the agency, this is the first monthly drop in house prices since May 2020.

Impact of rising mortgage rates on demand

Recent house price reports show the chilling effect of rising mortgage rates.

In July, mortgage rates doubled year on year.

Rates continued to climb to almost 6% in mid-June, and recession fears made rates even more volatile.

The Federal Reserve stepped up interest rate hikes to curb inflation, and mortgage rates rose accordingly.

Although the Fed does not directly set the interest rates that borrowers pay on mortgages, its actions do affect it.

Mortgage rates also tend to track 10-year US Treasury yields.

Investors often sell government bonds based on interest rate increases, which cause interest rates to rise and mortgage rates to rise.

When would-be homebuyers followed the rising rates, intimidation struck.

According to Steve Reich, chief operations officer of Finance of America Mortgage, home valuations also continued to decline after the peak in April.

“The gradual slowdown can be attributed to higher interest rates, which has tempered what many homebuyers can afford and, in turn, has softened home sales,” said Reich.

He also noted that home price growth is starting to moderate in some markets, particularly those with a high influx of buyers due to remote working during the pandemic.

George Ratiu, senior economist and head of economic research for Realtor.com, said:

“The combination of still-tight inventory in most markets and buyers trying to lock in a fixed monthly payments before rates rose even higher ensured that prices continued advancing.”

“However, the upward momentum has lost steam, and it is clear that the market peak is now firmly behind us.”

Ratiu also said that a slowdown in price increases appears to offer better opportunities for buyers in the coming months.

“The shares of homes with price cuts reached about 20% in August, the same level we saw in 2017 when real estate markets were on much more balanced footing,” he added.

“As mortgage rates are expected to keep rising, and current prices become even less sustainable for most buyers’ budgets, price cuts are likely to continue expanding.”

Ratiu also noted that today’s market is different than it was three weeks ago if homeowners plan to sell.

As the average monthly mortgage payment increased by hundreds of dollars over last year due to higher interest rates, the number of qualified buyers has decreased.

“Sellers who have a firm grasp of local market conditions and price accordingly from the get-go will be more likely to grab buyers’ attention and ensure a successful transaction,” said Ratiu.

Reference:

US home price reports show the cooling effect of rising mortgage rates