BAM Key Details:
- Black Knight’s May Mortgage Monitor Report shows a new record high for home prices, marking five consecutive monthly home price gains, reversing last year’s pullback.
- In over half (27) of the 50 largest U.S. metros, home prices have climbed up to prior peaks or reached new ones. Hartford, CT, had the highest month-over-month increase in home prices (+1.6%), with San Jose, CA, coming in second (+1.4%)
- If it weren’t for income growth since fall of 2022, May would be the most unaffordable month for home purchases in the past 37 years.
Black Knight (NYSE:BKI) just released its 2023 Mortgage Monitor Report for May, with a new record for their Home Price Index (HPI), signaling a full reversal of last year’s pullback.
In 27 of the 50 largest markets, chiefly in the Northeast and Midwest, home prices have either returned to their prior peaks or surged past them and reached new highs this spring.
As of May, home price appreciation (HPA) was at 0.1%. But if recent trends continue, that growth rate could turn and trend higher as early as June.
Record-low inventory is pushing home prices back up
Inventory remains at record lows, with for-sale inventory 51% below pre-pandemic levels, driving home prices up despite the Fed’s attempts to cool the housing market with rate hikes.
In 95% of major U.S. markets, inventory levels have dropped this year, with the biggest swings in Western metros, including Phoenix; Boise, Idaho; Ogden, Utah; San Francisco and Colorado Springs. Late last year, each of those metros had reached inventory oversupply as home sales slowed.
Compared to pre-pandemic levels, they’ve since swung back over 30 percentage points (pps) year-to-date.
With the combination of higher home prices, high mortgage rates, and a scarcity of affordable homes, many buyers are holding back hoping conditions will improve in the months ahead.
Potential sellers locked into rates 5% or lower are likewise waiting for more favorable mortgage rates, as many of them are likely to purchase their next home before selling their current one.
With the growing supply of multifamily rentals, though, more sellers may choose to take advantage of higher home prices to sell first and rent while waiting for lower rates and more inventory to buy their next home.
In May, it took 35.7% of the median household income to pay the average P&I mortgage payment. If it weren’t for income growth since fall of 2022, May 2023 would be the most unaffordable month for home purchases in the past 37 years.
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, remains the notable exception; inventory there 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.
Unlike Austin, for-sale inventory is moving the other direction in much of the country. Active listings have deteriorated in 95% of major markets so far this year and, overall, we’re 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 (SFR) units. SFRs made up just 40% of the total and are now at construction levels still approximately -30% below the 2005 peak.
Home prices are heating up after steep drops in 2022
Black Knight’s May report shows just how much home prices in Western markets have begun to climb again after falling in 2022.
San Jose, California, is a prime example. Last year, homes in this metro dropped 10% in price faster than any other U.S. market. Now, with inventory faltering, prices rose 1.4% month over month in May—the second-largest monthly price increase among U.S. metros.
Six Western markets with the biggest month-over-month home price increases:
- San Jose (+1.4%)
- San Diego (+1.1%)
- Los Angeles (+1.0%)
- San Francisco (+0.9%)
- Seattle (+0.9%)
- Sacramento (+0.8%)
Leading all of the above in-home price growth is Hartford, Connecticut (+1.6%), with its potent mix of relative affordability, strong buyer demand, and the largest inventory deficit of any market in the U.S. at -82%.
The challenge for the Fed now is to chart a path forward toward a ‘soft landing’ without reheating the housing market and reigniting inflation. But the same lever used to reduce demand – that is, raising rates – has not only made housing unaffordable almost universally across major markets, it has also resulted in significant supply shortages by discouraging potential sellers unwilling to list in such an environment, further strengthening prices. 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
Takeaways for real estate agents
Home price growth may be good news for your sellers if they’re inclined to sell first and then rent until they can buy their next home. Obviously, your buyers will be less than thrilled by the news, especially with mortgage rates above 7%.
Each person’s situation is different, just as each market has its unique set of advantages and disadvantages. Your job is to continually educate yourself with the information your clients need to make sense of the market and their options—and to get to know your clients well enough to see how best to serve them.