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Price Drop Paradox: Understanding the Only Major Market with Falling Home Values

Updated: 3 days ago

In the four weeks ending April 28, data from Redfin revealed that none of the 50 largest U.S. metro areas experienced a decrease in median home prices. This marks the first time since July 2022 that prices have either stagnated or risen across all major metros. However, in the following period ending May 5, Redfin reported a decline in the median home price in just one metro area: San Antonio, Texas.

 

The rise in home prices across major cities indicates certain health in the housing market, but it doesn’t guarantee a stable growth trajectory. Despite the drop in the average 30-year fixed mortgage rate after it peaked in late April, demand and purchase applications remain lower compared to the previous year. Persistent low inventory levels continue to elevate home prices, pushing both the median asking and sale prices to record highs.

 

Current Housing Market Indicators

What do these trends signify for investors? Let’s examine the details.

 

Demand

Mortgage purchase applications began to rise again after a slight decrease at the end of April, driven by the dip in mortgage rates. For the week ending May 5, the Purchase Index rose by 2%, with FHA loan applications increasing by 5%, although total applications were still 17% lower than the previous year, according to the Mortgage Bankers Association. Applications for homes priced above $1 million saw the most significant increase.

 

The Redfin Homebuyer Demand Index, reflecting demand for tours and services, dropped to its lowest level in two months, down 13% year-over-year as of May 12. Google searches for "home for sale" also fell by 8% month-over-month and 15% year-over-year.

 

Recent data from ShowingTime showed a decline in touring activity, which had previously been outpacing the same period in 2023.

 

While average mortgage rates are decreasing, prospective buyers may be waiting for a more significant change before entering the market, especially with low inventory and record-high average mortgage payments.

 

Listing and Sales Activity

Pending sales have decreased in recent Redfin reports, with a decline of over 3% year-over-year in each four-week period. However, new listings increased by 10% from May 2023, although this rise is relatively modest given the current inventory crunch. Active listings saw a 14.2% year-over-year increase.

 

Competition remains strong, but there are indications of a more balanced market. The supply has increased to 3.2 months, up by 0.5 points from the previous year, but it still suggests a seller’s market. The percentage of homes sold within two weeks fell from 49% a year ago to 45.2%, and the share of homes sold with a price drop rose to 6.3%, the highest since November 2022.

 

Market-Level Data

Home price increases were most significant in high-cost, competitive markets like Anaheim and San Jose, California, and West Palm Beach, Florida, as well as in affordable cities experiencing economic growth, such as Detroit. San Antonio saw a 0.5% decline in the median sale price, but prices remained stable or increased in the other 49 metros.

 

Pending sales rose in 12 major metros but declined in Phoenix, Atlanta, Houston, West Palm Beach, and Nashville. Only six metros saw a drop in new listings, with Chicago experiencing the largest decline at 8.1%.

 

Will Mortgage Rates Come Down?

The average 30-year fixed mortgage rate has steadily decreased, dipping just below 7% on May 16, according to Mortgage News Daily. Despite this, rates remain high compared to pre-2022 levels.

 

It's unlikely that mortgage rates will significantly drop in 2024. Despite easing inflation, Fed Chair Jerome Powell indicated that a consistent three-month decline in inflation is necessary before considering rate cuts. Most economists predict that the federal funds rate will stay above pre-2022 levels through at least the end of 2025.

 

Implications for Real Estate Investors

If rates decrease slowly, as expected, the reduction may not offer significant relief due to rising home prices. With sluggish demand and gradually increasing inventory easing competition, now could be a strategic time to invest in property and benefit from potential home price appreciation as demand rebounds.

 

Ultimately, the best decision depends on your local market and available inventory. Finding a property that generates cash flow is crucial, regardless of market conditions. Given the limited number of homes on the market, securing the right property may be your biggest challenge.


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