Rising Mortgage Rates Decrease Home Values as Buyers Flock to Affordable Areas

According to a new Redfin report, the total value of U.S. homes fell $2.3 trillion from its record high of $47.7 trillion last June to $45.3 trillion at the end of 2022—a loss of 4.9%. 

That’s the steepest June-to-December drop in percentage terms since 2008. 

While the total value of homes in December 2022 was up 6.5% year-over-year, that’s the smallest annual increase for any month since August 2020. 

The biggest factor behind these falling home values is waning buyer demand, which has caused widespread declines in home prices. 

Here’s what you need to know. 

Why are home values falling?

The median U.S. home sale price fell 11.5% from its peak of $433,133 last May to $383,249 in January, which is up just 1.5% year-over-year. 

Rising mortgage rates—a predictable consequence of the Federal Reserve’s efforts to bring inflation under control—are the primary reason for the decline in buyer demand. The average 30-year fixed mortgage rate was 6.36% in December, down from the 20-year peak of 7.08% in November but roughly twice the rate at the beginning of 2022. 

Rates dropped in January, but in February, after the Fed’s latest rate hike, mortgage rates started rising again, causing buyers and sellers alike to take a step back. 

Those who already own a home, especially those with low rates locked in, have little financial incentive to move. And those who have not yet purchased a home are finding it more difficult to achieve homeownership. 

Fortunately, a recent announcement by the Biden-Harris administration could offer some hope. 

Home values in the Bay Area have taken the biggest hit

The total value of San Francisco homes dropped by $37.3 billion or 6.7% year over year in December—a bigger loss in percentage terms than any other major U.S. metro. 

The six U.S. metros with biggest year-over-year declines in home values:

1. San Francisco, CA (-6.7%)
2. Oakland, CA (-4.5%)
3. San Jose, CA (-3.2%)
4. New York, NY (-1%)
5. Seattle, WA (-0.4%)
6. Boise, ID (-0.3%)

The silver lining for Bay Area buyers is that home prices have dropped, and competition remains at a low level compared to what they could expect during the pandemic home buying frenzy. 

In January, the median home sale price in San Francisco dropped 9.4% from a year ago to $1.3 million—the second biggest home value drop in the country. The silver lining for sellers is that the steep drop in home prices has lured some buyers back into the market. 

Pricey coastal tech hubs, particularly on the West Coast, have seen higher-than-average declines in home values for a few reasons:

1. They’re among the most expensive markets in the U.S., meaning home prices had more room to fall (than most)
2. They’ve seen more people leaving the area during the pandemic when remote work allowed buyers to prioritize space and affordability over proximity to their workplace. 
3. They’ve been hit hard by tech layoffs and, on top of that, many of their residents have significant investments in the stock market, which just had its worst year since 2008. 

While many of those laid-off tech workers are quickly finding new jobs, the lure of more affordable housing has drawn many of them to different areas of the country. 

Florida continues to lead in home price growth

Meanwhile, the total value of Miami homes shot up to $468.5 billion in December for an annual increase of $77 billion or 19.7%—the biggest annual increase in percentage terms among all the metros in Redfin’s analysis. 

Miami’s housing market in December had nearly the same value as July’s peak of $472 billion. 

The top five U.S. metros with the largest annual gains in home values:

1. Miami, FL (+19.7%)
2. North Port-Sarasota, FL (+17.8%)
3. Knoxville, TN (+17.7%)
4. Charleston, SC (+17.4%)
5. Lakeland, FL (+16.9%)

Florida is home to six of the 10 metros with the biggest annual gains in home values, in percentage terms, even after Hurricane Ian devastated the peninsula last fall, causing billions of dollars in damage and displacing thousands of Floridians. 

Florida remains a top migration destination for Americans in search of affordable housing, drawing buyers from the North and, as of recently, from considerably more expensive West Coast metros. 

People are also pouring in from New York and New Jersey, largely because Florida has relatively affordable homes—and no state income tax. 

Suburbs are getting more love than cities

Suburban homes, on the whole, are gaining more value than urban ones. In December, the total value of homes in American suburbs increased by 6.4% year over year to $25.4 trillion. 

Compare that to the value of urban homes, which rose 2.5% to $10.8 trillion. 

And while they make up a relatively small portion of the U.S. housing market, rural homes, too, fared better than urban ones, with total home value climbing 8.5% to $6.2 trillion. 

Suburbia became hot again during the pandemic when cities lost some of their appeal, largely because of the widespread shift to remote work and, of course, the housing affordability crisis. 

Millennials are gaining more home value than any other generation

Of all the generations, millennial homeowners have been gaining the most in home value appreciation. The total value of homes owned by millennials in this country rose a whopping 26.75% year over year to $5.6 trillion in Q3 2022—the most recent period for which this data is available. 

Gen X saw the second largest increase with home values climbing $18.4% to $13.9 trillion. Next up were Boomers, whose home values rose 12.9% to $18.1 trillion. 

Home values for the Silent Generation fell 6.7% to $4.4 trillion, as many in this group have passed or moved into retirement homes. 

Millennials have gained more home value primarily because they’re at prime home-buying age, meaning they’re buying substantially more homes than they have in recent years. 

Homes with high climate risk keep gaining value

You’d think after a few devastating storms and wildfires that people might avoid areas that were more prone to them. But the stats on home value increases tell a different story. 

Home values in areas facing a high risk from climate change—meaning a higher than average risk of flooding, intense heat, wildfires, drought, and catastrophic storms—have done as well or better than home values in markets with low climate risk. 

The total value of homes in markets with high flood risk actually increased 8.1% year-over-year in December, exceeding the 5.5% gain in low-risk markets.  

Home values in areas with high risk of intense heat were up 7.3%, compared with 1.9% growth in areas with low heat risk. 

Areas at high risk of storms and wildfires saw their home values increase by roughly the same amount, in percentage terms, as areas with low risk. 

Drought was the only climate change-related disaster for which home values rose more in low-risk markets (+6.6%) than in those with high risk (+3.7%). 

Research shows most home buyers do care about climate risks. But other factors—including affordability, proximity to family, and access to the outdoors—drive them to high-risk areas anyway. 

In fact, five of the 10 most popular migration destinations in Q4 2922 are in Florida, which faces a high risk of both flooding and intense heat. 

Asian neighborhoods see bigger drops in home values

The total value of homes in majority Asian neighborhoods dropped 0.7% year over year to $1.2 trillion in December. 

Home values in majority Black neighborhoods, by comparison, climbed 5.8% to $1.2 trillion. Majority white neighborhoods saw home values rise 6.9% to $37.4 trillion. And majority Hispanic/Latino neighborhoods saw an increase of 7.9% to $1.9 trillion. 

One reason behind the loss in home values for Asian homeowners is that many of them live in pricey neighborhoods on the West Coast, which has seen a relatively steep fall in home values. 

According to a 2021 report from Pew Research Center, roughly half of Asian Americans live in the West, and nearly a third live in California alone. 

Top takeaways for real estate agents

As long as mortgage rates are climbing—or remain high enough to deter both buyers and sellers—home values are likely to see some decline as demand falls. Time will tell how soon disinflation might result in an interest rate cut. 

For now, we have to work with the market we have. And that means finding every advantage for your clients and community that could help those who can’t afford to wait for more favorable conditions. What can you do for them that other agents in your area cannot—or will not—do?