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Housing Prices are slowly declining since recent Rates Hikes

Since March 22, the dynamic of the real estate market commenced to gradually change. On March 22, the Federal Reserve hiked interest rates by another 0.25 points, which now brings interest rates to 5%. It means that for anyone who seeks to borrow money, that person will have to pay at the very least a 5% interest on that money borrowed. The real estate market is perhaps the most sensitive to interest rate changes. The law of the market suggests that when interest rates rise, asset prices fall because the cost of borrowing to invest in assets becomes more expensive. And since the cost of borrowing became less affordable, this, therefore, discourages investors and consumers and subsequently reduces demand for those assets. This has been the case with the housing market.

Source: CoreLogic

The data from January to February 2023 previously forecasted that home prices will decrease on a month-to-month basis by 0.1% and increase on a year-over-year basis by 3.1% from January 2023 to January 2024. Why will home prices decline on a monthly basis but increase on a yearly basis?

Home prices will continue to decrease on a monthly basis because of a decline in demand for housing due to high monthly mortgage payments. Indeed, stubbornly high-interest rates offer little incentive to borrowers to purchase or refinance a home. Rates remain at or near 7% for the benchmark 30-year fixed-rate mortgage loan as of late March. On the other hand, home prices will increase on a yearly basis for two reasons: (1) the decline in prices will create opportunities for prospective homeowners to buy a home at an affordable price, which will reinvigorate demand, and (2) the Federal Reserve will probably pause on interest rates and may even decrease them, which will stabilize the cost of borrowing and make it more affordable in the long-run.

According to Selma Hepp, the Chief Economist for CoreLogic, median home prices tend to rise due to increased seasonal demand. She said:

“We see more competition among buyers, and higher-priced homes are usually listed. Housing supply also tends to grow during the spring months. And this is also the time of year when relatively more migration happens, as people graduate and move elsewhere looking for jobs.”

Dennis Shirshikov, a real estate agent analyst and strategist for the real estate website Awning, is more hopeful than Mrs. Hepp. He believes home values will remain stable this spring, while buyers will hold increased leverage as more housing inventory gradually hits the market. He declared:

“I expect supply to increase by 5% while the average days on the market will be reduced by up to 15 days.”

Source: Case-Shiller Home Price Index

Projections show the price of housing to decline further throughout the year. This decline presents an opportunity to purchase homes at affordable prices, which will eventually boost demand for housing but this demand wouldn’t create a situation where homes would be overpriced. We are far from having a recession triggered by the housing market as it was the case in 2008. In order for the housing market to trigger a recession, a few indicators must rally. These indicators are: (1) increasing loan-to-income levels; (2) overpriced properties that outpaced affordability, inflation, and economic fundamentals; (3) higher mortgage rates, (4) lower economic growth; (5) escalating mortgage balances; (6) climbing subprime mortgage loan numbers. When looking at these indicators in the current market conditions, it is highly unlikely that the real estate market will be the catalyst of the anticipated recession. We are not witnessing an increase in subprime mortgage loan numbers; the economy is not thoroughly slowing although interest rates are high, inflation has been declining for the past few months, and the job market remains resilient; housing prices are declining which means that it is unlikely that homes will be overpriced.


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