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US home price reports reveal the cooling effect of rising interest rates

In July, US home prices rose again. However, the market began to slow down as rising mortgage rates forced more potential buyers to the sidelines.

According to the S&P CoreLogic US National Home Price Index, July’s home prices increased by 15.8% over the previous year. This is a less dramatic increase than the 18.1% rise in June. This is the largest slowdown in index history, with a difference of 2.3 percentage points between the two months.

Prices fell 0.2% in June, marking the first decrease in the national index over a month since February 2012.

Craig J. Lazzara (managing director, S&P Dow Jones Indices) stated that although US housing prices are still substantially higher than they were a year ago, the July report shows a strong deceleration.

All 20 cities saw lower July price increases than the previous year.

The biggest gains were in Tampa, where home prices rose 31.8% over the previous year. This was followed by Miami which saw a 31.7% increase and Dallas with a 24.7% rise.

Lazzara stated that mortgage financing has become more costly as the Federal Reserve keeps moving interest rates up. This process continues to this day. “Given the potential for a more difficult macroeconomic environment, home prices could well continue to decline.”

The Federal Housing Finance Agency released a separate report Tuesday showing a similar trend in home prices in July. FHFA’s House Price Index, which measures changes to single-family home values over time, showed that home prices increased 13.9% year-over-year in July but declined 0.6% from the previous month. According to the agency, it is the first monthly drop in home prices since May 2020.

Demand has cooled due to higher mortgage rates

Home price reports show the cooling effect of rising mortgage interest rates.

In July, mortgage rates were almost double the rate they were a year ago. Rates became volatile after climbing to almost 6% in June, due to recession fears.

The Federal Reserve has been increasing mortgage rates to curb runaway inflation. Although the Fed doesn’t directly set mortgage rates, its actions have an impact on them. The yield on 10-year US Treasury bonds tends to be the benchmark for mortgage rates. Investors often sell government bonds when they anticipate rate increases. This sends yields higher, and mortgage rates rise.

According to Steve Reich, Chief Operations Officer at Finance of America Mortgage, the rate of home price appreciation has slowed since April’s peak, as more potential buyers feel squeezed by rising rates.

Reich stated that the gradual slowdown could be attributed to rising interest rates. This has dampened what homebuyers can afford, and in turn, has softened home sales.

He said that home prices are beginning to slow in some markets, particularly those with a large influx of buyers due to remote work during the pandemic.

“The combination of tight inventory in many markets and buyers looking to lock in a fixed monthly fee before rates rose higher made it possible for prices to continue rising,” stated George Ratiu (senior economist, and manager of economic research at Realtor.com). “But, the upward momentum is now losing steam and it is evident that the market peak has passed.

Ratiu stated that buyers could expect better opportunities as a result of the price decline.

He said that the August share of homes experiencing price reductions was 20%, which is the same as in 2017 when real estate markets were more balanced. Price cuts will continue to grow as mortgage rates rise and current prices are less affordable for most buyers’ budgets.

He said that today’s market is very different from the one of three weeks ago for homeowners who are selling.

The number of qualified buyers has decreased as the average monthly mortgage payment is now several hundred dollars more than last year, due to rising interest rates.

Ratiu stated that sellers who can price the product and understand local market conditions will have an easier time attracting buyers and ensuring a successful transaction.

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