ATLANTA — Housing markets along the West Coast and the Rocky Mountain region, including Denver, are the most vulnerable to price declines in the months ahead as sellers and buyers readjust their expectations.
“The market is clearly turning around,” Lawrence Yun, chief economist for the National Association of Realtors, told reporters gathered for the National Association of Real Estate Editors conference in Atlanta on Thursday.
In San Jose, Calif., home prices are already down 10% from their recent high, said Selma Hepp, an economist at CoreLogic.
That softness could spread to a region that has benefited from strong tech hiring and big house price increases during the pandemic and in the years before it.
Yun predicts U.S. home price gains will ease from double-digit increases at the start of this year to flat next year. But some regions will continue to see price increases, while others, mostly in the West, will see price decreases.
Hepp’s list of states most vulnerable to falling home prices includes California, Washington, Oregon, Idaho, Utah and Colorado.
Yun said the lack of affordability, which is at a 2006 low reached before the housing crash, is a major contributor to the difficulties the market is currently facing.
At the start of the year, mortgage rates on a 30-year loan were 3.3% and now they are above 7%, according to the Mortgage Bankers Association.
Yun said it had been at least 40 years since the market had seen mortgage rates rise so rapidly. Back then, mortgage rates were hitting much higher mid-to-teens levels as the Federal Reserve struggled to get inflation under control
But in percentage terms, the increase this year has been huge and fast, especially for new buyers who have seen rates double or nearly double since signing contracts.
Borrowing a term used in stock market investing, Yun said 7% on a 30-year loan represents “resistance” or a line of defense. He expects this line to hold, but if it doesn’t, the next resistance point on rates is around 8.5%.
“It will be another big shock,” he said if rates explode.
Several things should prevent a repeat of the national average 30% decline in home prices during the last housing recession. There were three to four times more homes available on the market in 2006 than there are today. This overabundance of inventory made it difficult to sell a home and contributed to a sharp drop in prices.
About 95% of those with mortgages now have rates below 5%, creating a strong “lock-in” bias among existing homeowners, Hepp said. Someone sitting on a 3% mortgage will have a hard time swapping it for a 7% mortgage unless they absolutely have to, further limiting inventory.
Tighter lending standards over the past decade should limit the number of subprime borrowers forced to sell in a declining market. And if people need to sell, American homeowners have amassed $29 trillion in equity, or about 70% of the underlying value of their homes, said Daniel Hale, chief economist at Realtor.com.
“Owners are in a much better position to face what lies ahead,” Hale said.
As for buyers, more of them are shut out of the market, but they are not giving up completely.
Strong demand from millennials in their early years of home buying is expected to support the market over the next five to seven years, paving the way for a strong rebound as affordability improves, predicted Lisa Sturtevant, chief economist at Brighton MLS, a multi-listing service covering six Atlantic states and the District of Columbia.
“Seven percent feel scary. People are seated, but they are not out of the game,” she said.
Some buyers will reduce what they are looking to buy, and others will move to lower cost markets where they can get more bang for their buck, a shift facilitated by the greater availability of remote working arrangements. Many will be waiting in the background, ready to pounce once affordability improves, Sturtevant said.
But expectations will have to adjust, for both sellers and buyers.
“That’s the scary part, how much we have to adjust our expectations,” Hepp said.