After record-breaking price appreciation over the last two years, the housing market has begun exhibiting signs of a possible recalibration. October 2022 marked the ninth straight month of decelerating monthly rent growth at 4.7%, down from January’s peak of 17.4%. Rising mortgage rates and shrinking buyer demand have led to some modest home price declines, especially in the metro areas that had previously experienced the highest price growth in the nation, according to the S&P/Case-Shiller Home Price Index.
However, these price trends do not mean housing is becoming more affordable. Current mortgage rates are pricing potential first-time homebuyers out of the home sale market, and the increasing number of households who are locked out of homeownership is exacerbating the pressure on a competitive rental market with few vacancies.
To better understand housing price volatility across the country, BPC created a diffusion index using Zillow data on home values and rents to follow up on the first index we created earlier this year in May.
BPC found the following trends:
- Although some metropolitan areas are registering housing price decreases across multiple months while others are experiencing pronounced drops, the national home-price average is still higher than it was last year.
- While the rate of growth for home prices has decreased across multiple months, home prices are still increasing on a year-over-year basis.
- Home values increased 13.5% year-over-year nationally and rents saw a 9.8% increase in October 2022.
- Year-over-year home values increased in 887 of 890 metro areas (99.6%), and rents increased in 104 of the 107 metro areas (97.2%) for which information was available.
Our biggest takeaway: recent reversals in housing price trends are not ushering in an era of improved housing affordability for renters or would-be first-time homebuyers.
A diffusion index shows how broadly a particular indicator is changing—i.e., an overall trend—as opposed to a specific level of change. For the diffusion indices above, BPC first calculated the year-over-year changes in all metro areas for which the Zillow Home Value Index and Zillow Observed Rent Index were available. Metro areas with increasing prices were then assigned a value of 1, unchanged prices were given a value of 0.5, and decreasing prices were given a value of zero. The index shows the average of these assigned values across all metros. For example, an index at 95% means 95% of metros have increasing prices. Metro areas with missing data were excluded from our calculations.
Housing remains unaffordable. High rents squeeze renters and higher mortgage rates inflate new homeowners’ monthly payments. Because of these higher borrowing costs, a typical home’s monthly mortgage payment comprises a significantly higher share of household income than it did in the two decades preceding the pandemic. For example, it costs $888 a month more nationally to buy an entry-level single-family home than to rent it. With their diminished buying power, consumers are facing reduced options in home quality and size, loans, and their ability to move.
At 7%, mortgage rates are at their highest in decades.
Looking ahead, industry estimates including from Wells Fargo and Goldman Sachs predict that home sale prices will fall between 5% and 10% in the coming months (with the most overvalued markets expected to see the most pronounced drops), but it’s unlikely that these changes will make housing more affordable soon. Dwindling consumer interest and purchasing power are causing downturns in various measures of housing market activity that will have long-term impacts on the country’s housing supply: the Wall Street Journal reported decreases in sales of new and existing homes, mortgage applications, and housing starts. Further, the rising monthly costs of homeownership are changing the dynamics of the housing market by increasing demand for single-family home rentals since more households are choosing to rent instead of buy. Since this is also encouraging major builders and developers to enter the business once dominated by mom-and-pop landlords, high borrowing costs are also affecting what types of homes are currently being built.
Climbing shelter costs are keeping inflation high while barriers to homeownership pressure the rental market. Recognizing the need to expand the supply of affordable housing to alleviate the pressure on the housing market, BPC and BPC Action has produced a legislative package to solve the housing affordability crisis through three avenues: increasing housing supply, preserving the existing stock of affordable homes, and helping families close the gap between incomes and high housing costs. We continue to advocate for bipartisan solutions to expand the supply of homes and improve the affordability of housing, especially for low-income households and first-time homebuyers.
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