Home prices drop for seventh-straight month to start 2023

·3 min read

U.S. home prices logged a seventh-straight monthly decline in January as rising interest rates continue to pressure home prices and the housing market overall.

The S&P CoreLogic Case-Shiller U.S. National Home Price index fell 0.5% in January compared to the previous month, according to data released on Tuesday. On a yearly basis, the index climbed 3.8% in January, down from 5.6% in the previous month.

The report's 20-City Composite index, which tracks prices in the 20 largest metros, showed prices fell 0.6% over the prior month in January and rose just 2.5% over last year. All 20 cities reported lower prices in the year ending January 2023 versus the year ending December 2022, the report said.

Regionally, the cities that saw the largest price gains over last year in January were in Miami, Tampa, and Atlanta with year-over-year increases 13.8%, 10.5%, 8.4%, respectively.

On the other hand, once-popular markets such as San Francisco, San Diego, Portland, and Seattle all saw homes prices fall against the prior year, with drops of 7.6%, 1.4%, and 5.1%, respectively.

"January's market weakness was broadly based," wrote Craig Lazzara, Managing Director at S&P DJI, in the release.

"Before seasonal adjustment, 19 cities registered a decline; the seasonally adjusted picture is a bit brighter, with only 15 cities declining. With or without seasonal adjustment, most cities' January declines were less severe than their December counterparts."

"Financial news this month has been dominated by ructions in the commercial banking industry, as some institutions' risk management functions proved unequal to the rising level of interest rates,” Lazzara added.

"Despite this, the Federal Reserve remains focused on its inflation-reduction targets, which suggest that rates may remain elevated in the near-term. Mortgage financing and the prospect of economic weakness are therefore likely to remain a headwind for housing prices for at least the next several months."

Relationship between home prices and monetary policy

The Federal Reserve on Wednesday raised its benchmark rate 0.25% to a range of 4.75%-5% and said additional policy rate increases may be appropriate, which could impact future home prices.

In a study published in March, researchers from the Federal Reserve Bank of San Francisco found that home prices respond to surprise monetary policy changes in just a few weeks.

"Housing list prices fall within two weeks after the Federal Reserve announces an unexpected policy tightening, similar to responses of other financial assets," Denis Gorea, Augustus Kmetz, Oleksiy Kryvtsov, Marianna Kudlyak, and Mitchell Ochse, wrote in the research letter.

SAN ANSELMO, CALIFORNIA - MARCH 22: A for sale sign is posted in front of a home on March 22, 2023 in San Anselmo, California. Pre-existing home sale prices in the U.S. dropped for the first time in 11 years. The national average price of an existing-home fell 0.2% in February to $363,000. (Photo by Justin Sullivan/Getty Images)
A for sale sign is posted in front of a home on March 22, 2023 in San Anselmo, California. (Photo by Justin Sullivan/Getty Images)

The twist, though, is that home prices react to unexpected changes in "long-term" interest rates rather than shifts in the short-term federal funds rate. This explains why changes in mortgage rates following the Fed's policy changes are "key" to rapid home price moves.

“When mortgage rates increase, list prices tend to decrease due to the higher total cost of owning a home,” the researchers noted.

Mortgage rates remain on the downswing, the 30-year fixed mortgage rate tumbled to 6.42% from 6.6% the week prior, according to Freddie Mac.

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