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US home prices have take a hit as mortgage rates continue to go up

Increasing mortgage rates influence US home prices
Increasing mortgage rates influence US home prices

Image source: Rew

Home prices in the US rose steadily in July, but the current market is showing signs of slowing.

The movement in the market is due to rising mortgage rates, which is marginalizing more potential buyers.

Home prices rose 15.8% year-on-year in July, according to the US National S&P CoreLogic Case-Shiller Home Price Index.

The jump is smaller than the 18.1% growth in June.

However, the 2.3% gap between the two months makes it the largest decline in the history of the index.

Drop in home prices

On a monthly basis, prices have fallen 0.2% since June, the first monthly decline for the national index since February 2012.

Craig J. Lazzara, director of S&P Dow Jones Indices, commented on the situation, saying:

“Although US housing prices remain substantially above their year-ago levels, July’s report reflects a forceful deceleration.”

Twenty cities had lower price increases in July compared to last year.

Tampa was able to record the biggest gain, as house prices rose 31.8% in July from the previous year.

Miami followed with an increase of 31.7% and Dallas with 24.7%.

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“As the Federal Reserve continues to move interest rates upward, mortgage financing has become more expensive, a process that continues to this day,” noted Lazarra.

“Given the prospects for a more challenging macroeconomic environment, home prices may well continue to decelerate.”

A similar trend in July house prices was observed in a report by the Federal Housing Finance Agency on Tuesday.

The FHFA House Price Index reported that house prices rose 13.9% year-on-year in July.

However, they fell 0.6% from the previous month.

According to the agency, this is the first monthly drop in house prices since May 2020.

How mortgage rates are affecting demand

Recent house price reports show the chilling effect of rising mortgage rates.

Mortgage rates doubled year on year in July.

Rates continued to climb to almost 6% in mid-June, and recession fears made rates even more volatile.

The Federal Reserve stepped up its rate hikes to curb inflation, and mortgage rates rose accordingly.

Although the Fed does not directly set the interest rates that borrowers pay on mortgages, its actions do affect it.

Mortgage rates generally follow the yield on US 10-year Treasury bills.

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Investors often sell government bonds on the basis of interest rate increases, which causes interest rates to rise and mortgage rates to rise.

As potential homebuyers followed the rise in interest rates, the intimidation began.

According to Steve Reich, chief operations officer of Finance of America Mortgage, home valuations also continued to decline after the peak in April.

“The gradual slowdown can be attributed to higher interest rates, which has tempered what many homebuyers can afford and, in turn, has softened home sales,” said Reich.

He also observed that the growth in the price of houses is starting to moderate in some markets, in particular those with a high influx of buyers following an external operation during the pandemic.

George Ratiu, senior economist and head of economic research for Realotor.com, said:

“The combination of still-tight inventory in most markets and buyers trying to lock in a fixed monthly payments before rates rose even higher ensured that prices continued advancing.”

“However, the upward momentum has lost steam, and it is clear that the market peak is now firmly behind us.”

Ratiu has also said that a delay in price increases seems to offer better opportunities to buyers in the coming months.

“The shares of homes with price cuts reached about 20% in August, the same level we saw in 2017 when real estate markets were on much more balanced footing,” he added.

“As mortgage rates are expected to keep rising, and current prices become even less sustainable for most buyers’ budgets, price cuts are likely to continue expanding.”

Ratiu has also observed that the current market is different from three weeks ago since the owners of houses plan to sell.

Since the average monthly payment of the mortgage has increased by hundreds of dollars compared to last year due to the higher interest rates, the number of qualified buyers has decreased.

“Sellers who have a firm grasp of local market conditions and price accordingly from the get-go will be more likely to grab buyers’ attention and ensure a successful transaction,” said Ratiu.


US home price reports show the cooling effect of rising mortgage rates

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