By Haddon Libby
According to Fortune Magazine, the total value of all homes in the United States is down 5% or $3 trillion from a June 2022 high of $48 trillion. Still, prices are $13 trillion higher than before COVID. Redfin states that the average price of a home in the U.S. was $384,000 last week.
In the most recent release minutes from the last Federal Open Market Committee meeting, Fed officials believed that the valuation of residential homes “remained high” with “the potential for large declines in property prices.” The committee came to this conclusion despite the fastest decline in home values since The Great Recession of 2008 over the last six months.
It is easy to see why prices are falling. Mortgage rates are 3% higher than just one year ago at 6.5% for a 30-year fixed rate loan. Due to strong numbers for the U.S. economy in January, most market watchers expect the Fed to boost its key Fed Funds rate to at least 5.5% range by this summer. Jamie Dimon, CEO of JP Morgan Chase stated just last week that he sees the Fed rate moving above 6% before the Fed is done with its monetary tightening policies. If this is the case, home buyers can expect 30-year fixed rate mortgages costing more than 7% during the second half of this year.
With this as a backdrop, it is no surprise that 23 of the 29 top real estate forecasters expect lower prices on homes as the year progresses.
Across the United States, 274,000 homes sold in January, a 34% drop from only one year ago when 414,000 homes were sold. Overall, 1.3 million homes were up for sale in January, a 20% increase in inventory from one year ago. The average time of the market was 51 days, a 24 Zillow day increase from last year. About one in five homes sold for less than the asking price while one in five sold for more. For comparison, 60% of homes were selling for more than the list price last June.
At the end of January, found that 276 of the 400 largest metropolitan markets had the prices on home sales falling while 124 markets remained near 2022 highs. The strongest markets have been in more affordable parts of the United States that boast lower tax rates. Weakness is felt most heavily in the most expensive metro markets. Suburban areas saw the most price resiliency due to better affordability and larger homes.
According to Redfin, it remained a seller’s market in places like Fayetteville North Carolina, Fort Wayne Indiana, Omaha Nebraska, Richmond Virginia, Wichita Kansas, Virginia Beach, and Anchorage.
One in four home buyers were looking to relocate to places where homes were more affordable, and the cost of living was lower. This meant that people were migrating from high-cost locations like California, New York, Washington DC, Illinois and Massachusetts in order to move to Florida, Texas, Tennessee, Arizona and South Carolina.
Redfin reported that Miami was the most sought-after place to relocate to with Sacramento, Las Vegas, Phoenix and Tampa rounding out the top five. The Miami market continued its surge – up 20% over the last year. Knoxville was second at 18% followed by Charleston SC and the state of Florida at 17% each.
People were looking to leave San Francisco the most followed by Los Angeles, New York City, the District of Columbia and Chicago. San Francisco saw the biggest drop in the market value of its homes, down 7% or $37 billion to $518 billion. Bend Oregon had the largest drop in prices at 9% followed by San Francisco at 7% and Phoenix at 6%.
In California, 71,000 homes for sale at the end of January. The median price (the price where half of homes are more or less expensive) was a pricey $733,000 or $410 per square foot. Palm Springs slightly exceeded the state at $414 per square foot with an average home price of $900,000. Time on the market for these homes was 74 days.
For prospective home buyers, now may be a good time to exhibit patience and wait for higher rates to bring down the sales price of a home. If rates peak later this year, 2024 could be when home affordability improves.
Haddon Libby is the Founder and Chief Investment Officer of Winslow Drake Investment Management, a RIA firm. For more information, please visit www.WinslowDrake.com.
