Housing prices are decelerating at a record rate as mortgage rates push ever higher and make housing less affordable.
Prices rose 13% on the year in August, much slower growth from the month before, when prices were up 15.6%, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index. That 2.6 percentage-point deceleration is the largest in the history of the index, which has been used as a gauge since 1987.
“The forceful deceleration in U.S. housing prices that we noted a month ago continued in our report for August 2022,” said Craig Lazzara, managing director at S&P DJI, in a release. “Price gains decelerated in every one of our 20 cities. These data show clearly that the growth rate of housing prices peaked in the spring of 2022 and has been declining ever since.”
The deceleration comes as the Federal Reserve continues to hike its interest rate target aggressively in an attempt to slow demand in response to stickier-than-anticipated inflation. Mortgage rates are climbing and have hit their highest level since 2002 amid the Fed’s historic tightening.
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Data from Freddie Mac found that the average 30-year fixed-rate mortgage popped to 6.94% in the week ended Oct. 20. Mortgage rates, gauged by Mortgage News Daily, which tracks rates on a day-to-day basis, have ballooned to 7.29%, more than 4 percentage points higher than this time last year.
“Housing reports dominated a lean economic calendar this week. Unsurprisingly, the news on this sector was uniformly downbeat, reflecting the ever-worsening financial backdrop that is the lifeblood of the housing market,” said economists with Oxford Economics on Monday. “Given the prospect for even higher rates, the outlook for home sales and building activity in coming months has turned grimmer.”
Housing is perhaps the sector most responsive to interest rate hikes, as mortgages rise in tandem. House prices have stayed quite high (despite the deceleration), meaning that, combined with higher mortgage rates, housing affordability has dramatically declined.
The central bank has hiked rates by 75 basis points during its last three meetings, an extremely fast pace by historical standards.
As a result of rising mortgage rates, housing starts, or the number of new residential buildings under construction, have also tumbled. Housing starts dropped 8.1% in September to a seasonally adjusted annual rate of 1.44 million, according to a recent report from the Commerce Department.
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Interest rates, and in turn mortgage rates, are likely to continue rising because of the trajectory of inflation. The consumer price index clocked in at a smoldering 8.2% last month, hotter than expected. The stubbornly high prices are expected to keep the Fed focused on driving up interest rates in order to crush inflation.
The drawback of rapidly rising interest rates is that it could knock the U.S. economy into a recession, something that economists are saying appears ever more likely. Economic modeling by Bloomberg now puts the odds of a recession in the next 12 months at 100%.
