The headline is enough to make anyone pause. Including real estate agents, who have recently been reassuring consumers by saying the market is decelerating, not declining.
But according to the latest Mortgage Monitor Report from the Data & Analytics division of Black Knight, Inc. (NYSE: BKI), the deceleration in the growth of home prices shifted to actual decline.
The report shows a decline from June to July 2022, while year-over-year home prices continue to grow. Even so, it’s the first month-over-month decline from Black Knight’s datasets in nearly three years.
The build-up to July’s decline in home prices
After 31 consecutive months of home price growth, July saw a decline of 0.77% from June—the biggest drop since January 2011. Annual appreciation is still in the double-digits, at over 14%. Does the shift to a month-over-month decline speak of what’s to come in quarter four?
Black Knight Data & Analytics President Ben Graboske shed some light on their latest findings:
This cooling has been indicated in our home price data for several months now, and at an increasing pace. In January, prices rose at 28 times their normal monthly rate before slowing to five times average in February as interest rates began to tick up. Even May was still about two times normal, before June growth came in 70% below the long-run average. And all the while, annual appreciation continued to appear historically strong, showing double-digit growth month after month. Without timely, granular data, market-moving trends don’t become apparent until they’re right in front of you—like a sudden shift to the largest single-month decline in home prices in more than a decade.
Double decline for tappable equity
Tappable equity is the amount a homeowner can borrow against while maintaining a 20% equity stake. In the second quarter of 2022, total tappable equity reached its 10th consecutive record high at $11.5T. But the data shows it peaked in May of this year.
Escalating declines over June and July have brought total tappable equity down 5%, suggesting a significant drop is likely for Q3—the first quarterly reduction since 2019.
Some areas have already seen notable declines in tappable equity; the five most equity-rich West Coast markets lost 10-20% from April through July.
- San Jose: -20%
- Seattle: -18%
- San Diego: -14%
- San Francisco: -14%
- Los Angeles: -10%
Any decline in home prices results in a twofold decline in tappable equity; a 5% drop in home values nationwide would translate to a 10% decline in tappable equity.
And while tappable equity for mortgage holders had grown 25% from last year and reached another record high in the second quarter, it seems to have peaked in May, pivoting for the pullback that began in June before picking up the pace in July.
Roughly 275,000 homeowners would fall underwater with their home equity from a 5% decline in home prices; more than 80% of these bought their homes in the first half of 2022.
Cooling buyer demand allowed inventory levels to build for the fifth month in a row, with July showing the third consecutive record-breaking surge in supply. Even with the 128,000 increase in active listings, inventory is still 45% below 2017-2019 levels.
According to Black Night Collateral Analytics data, inventory at the end of July stood at 3.1 months—up from 1.7 months at the beginning of 2022.
If sales keep falling and listings continue to build at their current rates, we’ll cross the six-month threshold for inventory by December.
The Goldman Sachs forecast
It’s important to note that Goldman Sachs is not yet forecasting a decline in home prices across the board. While they acknowledge declines in some home-price indexes, they attribute those to the changing sales composition rather than a broad-based decline.
According to their report, home values continue to rise, though at a slowing rate.
The Goldman Sachs research team expects price growth to decelerate at a pace of 14% year-over-year in the last three months of 2022 and then “stall completely” — possibly throughout 2023.
Areas where existing home sales and building permits increased the most early in the pandemic are now experiencing the sharpest declines in both, which suggests these declines are part of the market’s rebalancing from the pandemic housing boom.
Top takeaways for real estate agents
If your market is experiencing obvious drops in home prices, to the point where buyers are questioning whether they’ll end up underwater if they buy now, collect the data you need to show them the bigger picture of what’s going on nationwide as well as in your market.
Ultimately, you want them to know the landscape well enough to make the right decision for them. Help them sift through the data and the confusing headlines, and they’ll trust you to guide them through the process of buying or selling a home when they’re ready.
Remind your clients that what we’re seeing is the market rebalancing after the buying frenzy early in the pandemic. And like all shifts in the market, it’s temporary.