There is nothing small about a downward revision of 5.4 percentage points in a single month. For a $500,000 home, that eliminates $27,000 in anticipated home price appreciation. A review like that only happens if the forecast entries have gone sour.
“Zillow’s outlook for home prices has been revised down significantly due to a sharp drop in July,” Zillow economists write. Bottom line: The July housing data was bad, really bad.
In general, the real estate market weakened in July. The month was the largest in history (since 2016) increase in total inventory on realtor.com. Year after year, new home sales Y Existing Home Sales now they are down 17.4% and 20.2%, respectively. At the same time, single family homes started have fallen by 18.5% and mortgage purchase applications have dropped by 18.4%.
There’s another reason Zillow might feel a bit more bearish: Its analysis finds that some regional housing markets saw home price declines in July.
According to Zillow, 30 of the 50 largest housing markets in the country saw home price declines month over month in July. That includes a 4.5% drop in home prices in San Jose. Not far behind are Phoenix (-2.8%), San Francisco (-2.8%), Austin (-2.7%) and Sacramento (-2.5%).
“While the recent price decline is a notable development, the housing market is still far from returning to normal conditions. The current slowdown is caused by the collision of extreme price growth during the early and mid-pandemic with the surge in mortgages since December, a combination that rapidly weakened potential homebuyers’ ability to pay for or qualify to buy their next home,” writes Zillow Chief Economist Skylar Olsen.
On multiple occasions this summer, Zillow has affirmed its opinion that we are not even in a housing bubble not a real estate collapse. Instead, see this as a real estate market trying to find its footing in the midst of a period of skyrocketing mortgage rates.
Normally, it’s in bad taste to focus too much on house price changes from month to month. Right now could be an exception. Rick Palacios Jr., head of research at John Burns Real Estate Consulting, tells Fortune we should be looking at month-to-month shifts. He believes that home price declines suggest that some frothy markets, like Phoenix and Boise, they have already seen how the maximum prices of their houses “vanish” and are on track for year-over-year price declines in 2023.
“A strong argument could be made that in many real estate markets the last 10% of home price appreciation was purely aspirational and irrational, and that will get over very quickly,” says Palacios. “That is exactly what we are all seeing right now.”
John Burns Real Estate Consulting isn’t the only company feeling a bit bearish. Capital Economics, Zelman & Associates, and Zonda also forecast modest declines in home prices by 2023. Economist Robert Shiller, who predicted the 2008 housing crash, think home prices could fall 10%. Fitch Ratings Says Home Prices Could Fall 10-15% If he housing recession gets worse
The regional housing markets that are most affected by the slowdown fall into one of two groups.
The first is the high-cost technology centers. This grouping includes markets such as San Jose, San Francisco and Seattle. Not only are its high-end real estate markets more rate-sensitive, but so are its tech sectors. Look no further than the mounting startup layoffs.
the second group includes sparkling markets like Austin, Boise, Phoenix and Las Vegas. The housing boom during the pandemic has pushed home prices in markets like Phoenix and Boise far beyond what local incomes would historically support. According to Moody’s Analytics, Boise is only “overvalued” by 72%. Historically speaking, when a housing cycle “turns around”, it is typically the significantly “overvalued” housing markets that are most at risk of home price corrections. If inventory spikes are any indication, those frothy markets could well be headed for 2023 price corrections.
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