There’s nothing small about a 5.4-percentage-point downward revision in a single month. For a $500,000 home, that wipes out $27,000 in anticipated home price appreciation. A revision like that only happens if the forecast inputs have soured.
“Zillow’s outlook for home prices has been revised down significantly due to a sharp downturn in July,” writes Zillow economists. Simply put: July housing data was bad—really bad.
Across the board, the housing market weakened in July. The month saw the largest ever (dating back to 2016) uptick in total inventory on realtor.com. On a year-over-year basis, new home sales and existing home sales are now down 17.4% and 20.2%, respectively. At the same time, single-family housing starts have fallen 18.5% and mortgage purchase applications are down 18.4%.
There’s another reason that Zillow might be feeling a bit more bearish: Its analysis finds some regional housing markets saw home price declines in July.
According to Zillow, 30 of the nation’s 50 largest housing markets saw month-over-month home price declines in July. That includes a 4.5% home price dip in San Jose. Not too far behind are Phoenix (-2.8%), San Francisco (-2.8%), Austin (-2.7%), and Sacramento (-2.5%).
“While the recent decline in prices is a notable development, the housing market is still far from a return to normal conditions. The current slowdown is prompted by the collision of extreme price growth during the early and mid-pandemic with the sudden increase in mortgage rates since December—a combination that swiftly weakened would-be homebuyers’ ability to afford or qualify to purchase their next house,” writes Zillow chief economist Skylar Olsen.
On multiple occasions this summer, Zillow has affirmed its view that we’re in neither a housing bubble nor a housing crash. Instead, it views this as a housing market trying to find equilibrium amid a period of spiked mortgage rates.
Normally it’s in bad taste to focus too much on month-over-month home price shifts. Right now might be an exception. Rick Palacios Jr., head of research at John Burns Real Estate Consulting, tells Fortune we should be looking at month-over-month shifts. He believes the home price drops suggest that some frothy markets, like Phoenix and Boise, have already seen their home price tops “blown off” and are on a path toward year-over-year price declines in 2023.
“You could make a strong case that in a lot of housing markets the last 10% of home price appreciation was purely aspirational and irrational, and that’ll come off the top really fast,” Palacios says. “That’s exactly what we’re all seeing right now.”
John Burns Real Estate Consulting isn’t the only firm feeling a bit bearish. Modest 2023 home price declines are also forecasted by Capital Economics, Zelman & Associates, and Zonda. Economist Robert Shiller, who predicted the 2008 housing crash, thinks home prices could decline 10%. Fitch Ratings says home prices could fall 10% to 15% if the housing downturn worsens.
The regional housing markets getting hit the hardest by the slowdown fall into one of two groups.
The first is high-cost tech hubs. This grouping includes markets like San Jose, San Francisco, and Seattle. Not only are their high-end real estate markets more rate sensitive, but so are their tech sectors. Look no further than the mounting startup layoffs.
The second group includes frothy markets like Austin, Boise, Phoenix, and Las Vegas. The Pandemic Housing Boom has pushed home prices in markets like Phoenix and Boise far beyond what local incomes would historically support. According to Moody’s Analytics, Boise alone is “overvalued” by 72%. Historically speaking, when a housing cycle “rolls over,” it’s normally the significantly “overvalued” housing markets that are at the highest risk of home price corrections. If inventory spikes are any indication, those frothy markets could very well be headed for 2023 price corrections.
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