Something Had to Give: Home Prices Down for First Time in 32 Months

The latest data from the Black Knight Home Price Index shows clear signs of an inflection point. For the first time in 32 months, home prices saw a month-over-month dip in July, as growth tipped from deceleration to decline.

Annual home price growth still clocked in at 14.3% – more than three times the long-run average – but most of that appreciation occurred in the last months of 2021 and earlier this year. Such strong annual growth rates can hide underlying weakness. Month-over-month data gives us a much clearer picture of just how much – and how quickly – the housing market has shifted.

The median home price fell by 0.77% in July, the largest single-month drop since January 2011. On a seasonally adjusted basis, July’s dip ranked among the 10 largest monthly declines on record, dating back more than 30 years.

At the start of 2022, home price growth was running at 28 times the 30-year seasonal average. It was the tail end of an unprecedented run of appreciation. Then, interest rates began to tick up and that growth tapered to just over five times average in February. By May, growth had contracted to twice the normal rate, and in June price growth was 70% below the long-run average, but still positive.

Now home prices have marked their first monthly decline in nearly three years ­ – and in July, a month when prices typically rise by about 0.4%.

Looking ahead, we are moving into what have historically been more neutral months for the housing market. Even during the Great Recession, home prices typically rose marginally from March to May, with effectively all price declines during that era taking place from July through February.

With housing affordability still near its worst levels in more than 35 years, downward price pressure is likely to continue in the coming months. It would require some combination of either a 30% rise in incomes, a 2 percentage point decline in 30-year rates, or home prices pulling back another 20% to bring affordability back in line with long run averages.

Market Insights

While prices through July were only off peak by less than 1% nationally, some markets have seen much more significant pullbacks.

All in, more than 85% of major markets have seen prices come off their peaks through July, with a third dropping more than 1% and more than one in 10 falling by 4% or more.

San Jose, Calif., experienced the most significant pullback, with the average home price down 10% in recent months followed by Seattle (-7.7%), San Francisco (-7.4%), San Diego (-5.6%), Los Angeles (-4.3%) and Denver (-4.2%).

The velocity of this market correction is as noteworthy as the declines. There have been several examples over the past 30 years where markets have seen double-digit price drops. None, however, come close to what San Jose has experienced in the span of only three months.

In the early 1990s, for example, it took an average of 2.5 years for a number of West Coast markets to shed 10% of their value. Even during the Great Recession of the mid-2000s, it took two years, on average, for prices to drop 10%. Riverside, Calif., dropped the fastest, and it still took 13 months.

The fastest price drop on record, prior to this recent downturn, also belonged to San Jose, which saw prices drop 10% in eight months back in 2001, when the dot-com bubble burst.

A Strong Position

While talk of sudden, sharp home price declines may be jolting, the truth is that the market is in about as strong a position as it has ever been to absorb the impact of such a correction. More than that: at the macro level, these declines are a welcome sight and have been a long time in coming.

Through the pandemic, record low interest rates enabled the average home price to rise at a record pace, resulting in the average home being valued at more than six times the median household income. That’s the largest multiple on record, dating back more than 50 years. While this has built unprecedented homeowner wealth in the form of equity, it has also created immense and sustained affordability challenges, especially for first time homebuyers.

We’ll continue to keep a close eye on the Black Knight HPI and multiple home price data sets to track and analyze market trends in as close to real time as technology allows. Please check back here for updates throughout what are sure to be some very interesting months to come.