Home prices may be on the verge of cooling off

In July, home prices rose by 2.3% compared to the same month last year, although the monthly increase was below historical averages.

Home prices may be on the verge of cooling off

Home prices, which have been on a steady rise since January, might be starting to decrease once more.

The most recent data on home prices indicates that they reached a new record high in July, increasing by 2.3% compared to the same month last year, as per Black Knight's report. This annual gain is larger than the approximately 1% recorded in June, and it's likely that August's year-on-year comparison will be even greater due to the significant price drop that began in August of the previous year.

However, Black Knight's data also shows a month-to-month weakening in prices. Despite still increasing, which is typical for this time of year, the gains fell short of their 25-year average. This follows a period from February to June where they significantly exceeded their historical averages, suggesting that a slowdown in prices might be on the horizon.

"Along with the slowing of monthly gains below long-term averages, Black Knight's rate lock and sales transaction data also indicate lower average purchase prices and seasonally adjusted price per square foot in recent sales," stated Andy Walden, Black Knight's vice president of enterprise research. "All these factors together highlight the importance of focusing on seasonally adjusted month-over-month movements rather than solely relying on the traditional annual home price growth rate."

The rise in mortgage rates is a key factor behind the cooling off of prices. These rates increased sharply last summer and fall, leading to a drop in prices. They then decreased for most of the winter and some of the spring, causing home prices to rise again. Now, rates have once again surpassed 7%, reaching their highest levels in over 20 years in August.

Moreover, there was an unusual increase in new listings from July to August, possibly because some sellers are trying to capitalize on the historically high prices. However, active inventory remains about 48% lower than the levels seen from 2017 to 2019.

"While the increase in new listings is positive news for home buyers, inventory continues to be stubbornly low, even with record-high mortgage rates dampening demand," commented Danielle Hale, chief economist for Realtor.com.

A decrease in prices could provide some relief for buyers, but probably not enough.

The surge in home prices since the onset of the Covid pandemic, coupled with significantly higher mortgage rates, has severely impacted affordability.

According to Black Knight, it now requires approximately 38% of the median household income to cover the monthly payment on a median-priced home purchase. This makes homeownership the least affordable it has been since 1984.