Housing Prices Fall 0.3% Monthly Amid High Mortgage Rates

Recent indicators from the housing market reveal a persistent decline in home prices, with consecutive month-over-month decreases. This trend is exacerbated by an increase in housing supply and tepid demand, as mortgage rates remain high, hovering around 7%. According to Capital Economics, this slump in prices raises the risk of a prolonged downturn in the housing market.

The housing market has been largely stagnant since mortgage rates surged a few years ago. However, recent data suggests a potential extended slump in prices. The latest Case-Shiller home price report indicated a 0.3% monthly fall in the 20-city index in April, which is steeper than the downwardly revised 0.2% dip in March. This back-to-back decline in prices raises concerns about a deeper correction in the housing market, as the market struggles under the weight of near-7% mortgage rates.

On a three-month annualized basis, house prices fell by 0.4%. While prices are still up on a year-over-year basis, the pace of increase is the slowest since August 2023. The Case-Shiller data is not the only indicator of trouble; the FHFA price index also showed a 0.4% monthly drop. This suggests that the existing homes market is losing momentum as demand remains weak due to high borrowing costs, while more people are putting their homes up for sale, forcing sellers to adjust their price expectations.

Previous data also aligns with this downtrend. The median sale price of an existing home has dropped for five consecutive months on a seasonally adjusted basis. This coincides with the number of homes available for sale returning to pre-pandemic levels. Lower prices could make homes more attractive, potentially spurring more demand and providing some relief for younger Americans who have been priced out of the market. However, economists at Citi Research have flagged ongoing headwinds, attributing the price declines to high mortgage rates, elevated uncertainty, softening consumer demand, and a weakening labor market.

Slower activity in the housing sector overall is an early sign that underlying demand is weakening this year. While prices could still fluctuate month-to-month, consistent softening in median sale prices suggests that the trend is likely to continue in more stable measures of new home prices, such as the Case-Shiller index. Capital Economics notes that there are still reasons to believe a prolonged downturn can be avoided. Supply remains relatively tight overall, despite some recent expansion. The mortgage market is also healthy, reinforced by more than a decade of stricter lending standards instituted after the Great Financial Crash. Continued resilience in the labor market should prevent forced selling in the housing market.

However, the weakness in recent price data means that the prospect of an extended period of house price declines must be taken more seriously. This is something that will be considered in the upcoming US Housing Outlook. The increase in cancellations of home purchases further indicates the strain that high mortgage rates are placing on potential buyers. As the cost of owning a home becomes less affordable, more people are opting to rent instead. This shift in consumer behavior could have a significant impact on the housing market, potentially leading to a deeper correction. The risk of a market crash is heightened by the fact that the cost to own a home is moving closer to the cost to rent, making homeownership less attractive for many.