If you’ve been squeezed out of the tight housing market over the past couple of years waiting for the opportunity to buy, you might finally be getting your chance – and some places are already looking more attractive for buyers.
The housing market is beginning to cool and cities that have seen an “influx of affluence” as Rick Palacios, Jr. calls it, may see prices drop the farthest.
Palacios is the director of research at John Burns Real Estate Consulting, which delivers analysis on the housing market to clients such as builders, realtors and investors.
He’s predicting a significant downturn in the housing market in Boise, Austin, Nashville, Phoenix, Sacramento and other cities where prices climbed during the COVID-19 pandemic as more people moved to them.
“These are some of the markets where we were anticipating the steepest price declines in 2023,” says Palacios.
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Once tight markets will be leading the way down
They’re the cities people flocked to during the pandemic, garnering them the nickname “Zoom towns”. They have a high quality of life and traditionally lower housing prices than the major centers.
And since the beginning of the pandemic, people who could work remotely have relocated to these areas, nabbed the relatively cheap homes and drove up prices.
But Palacios is predicting a steep drop in housing prices in these cities, with Boise leading the way.
Boise became one of the least affordable cities to buy during the pandemic as an influx of people bought property in the area. House prices reached 72% above what a middle-income family can afford last year, according to Oxford Economics.
“Boise is one of those markets that always rides the bubble wave. When things are great, I mean, it just – it catches that wave,” says Palacios.
But the same can be said for when things start going downhill.
“Just looking at the growth rate in home appreciation, [Boise] has reversed completely. And it is, I think, the single market that we anticipate actually getting to price declines in 2022.”
And though this might be tough news for people who have bought in Boise and similar cities in the past couple of years, it’s good news for anyone looking to buy property — although it may take several months or even years before prices level out.
Investors are pumping the breaks
Home values in Phoenix went up 25% over the past year, according to Zillow’s value index.
“As of the first quarter of this year… investor transactions are 45% of the entire housing market,” says Palacios.
That includes people buying second homes, investment properties and houses to flip.
“That's a big deal,” says Palacios. “And there's a lot of markets across the country where investor transactions are now 30-40-45% of all home purchases.”
Markets that depend on investment activities do well on the upside, says Palacios, but they can turn quickly.
“That's why we've got some pretty negative forecasts, especially on a relative basis to more kind of slow, steady markets.”
According to Redfin, investor purchases in Nashville were down nearly 17% in the first quarter of 2022, 17% in Las Vegas, and 21% in Sacramento.
Inventory on the rise
From February 2020, before the housing market went haywire, to today, housing prices in Boise are up 58%, says Palacios. In Austin, they’re up 75% and in Nashville, it’s up 56%.
“We look at affordability as probably one of the most, if not the most, important indicator for how sustainable things are in a market,” says Palacios.
And as interest rates began to rise — the national rate on a 30-year mortgage is now 5.5%, according to Freddie Mac — it became clear how unsustainable those prices had become.
“The monthly payment is up 40-50% year over year,” says Palacios. “And that's a huge shock to that buyer, which tells you why these markets have pulled back so fast.”
Companies are also starting to bring people back to the office, which has played some part in more people putting their homes up for sale and a growth in inventory.
June saw an 18% increase in housing inventory nationally year over year, according to Realtor.com.
Ratiu says inventory is growing in Austin, Raleigh, Nashville, Sacramento and others – again, cities that saw a surge in population over the past two years.
“These markets have, in many ways, attracted people from coastal, much more expensive markets,” Ratiu says.
“Austin has been a magnet for a lot of tech workers from San Francisco, Silicon Valley, Seattle, Los Angeles, most of them really attracted to the relative affordability. It's not surprising to see that, in turn, these markets are sort of leading the shift in the market.”
Austin saw some of the biggest growth in inventory, according to Redfin. The number of homes for sale in the city rose by 27% in June, compared with last year.
But as more homes come on the market, sellers are still hoping for those top of the market prices, says Ratiu.
“Markets have changed dramatically in the last three months. And what we're seeing pricing wise, we're still seeing a lot of homeowners list homes based on the market from six months ago.”
And price cuts for listings are on the rise. In June, 11% of listings nationally cut their prices, compared with 6% in June the year before.
More than 60% of sellers in Boise had to cut their prices in June, according to Redfin.
What should buyers do now?
Palacios says all signs point to a housing slow down, and though it may take several months or more for prices to come down, if you can wait, you should.
“We haven't been in a slowing environment for several years,” says Palacios.
“The choices are going to be out there. And I don't think it's the worst decision in the world to be a bit more patient now than you would have been when rates were 3-4%.”
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