Housing market: In which cities are single-family homes prices falling?

The housing market is one of the sectors most impacted by the Federal Reserve’s decision to rapidly increase interest rates.

The average rate applied to a thirty-year mortgage has risen from 3.92 percent a year ago to 6.32 today. Before these rate hikes took effect, the housing market had been on fire, with prices rising rapidly in cities and towns nationwide. As the price of a mortgage has risen over the last year, demand has begun to fall as low-and-middle-income buyers, and first-time home buyers are priced out of the market.

Where are prices falling the fastest?

Thanks to Zillow, we are able to compare the average home prices between July and December 2022 to those seen in January 2023 to identify cities where prices are falling.

There are a few locations where a decrease in average house price has fallen more than five percent, but many of these towns are home to very small populations. Our team looked into housing markets in areas with populations larger than 50,000.

Of capital cities, Austin, Texas, has seen the largest fall in average home prices in recent months, followed by Boise, Idaho (-5.25%), Pheonix, Arizona (-4.41%), and Sacramento, California (-4.1%).

Where are prices falling in more affordable markets?

Focusing on markets where the average single-family home price is under $250,000, the reductions in price are much smaller than in more expensive areas:

Could Federal Reserve rate hikes make housing more expensive?

Around forty-five percent of cities tracked by Zillow are seeing prices increase. While the US central bank plans to push rates even higher, which could reverse this trend, some economists aren’t sure the right levers are being pulled.

One major issue in the US housing market is the lack of supply of affordable housing. With family sizes decreasing and younger generations holding different preferences over where to purchase homes, the housing stock is beginning to diverge from the needs of potential buyers. On the other end of the age spectrum, smaller single-story homes for seniors looking to live independently may also need to be built at an increasing rate as the Baby Boomer generation ages.

Assuming that demand remains consistent, basic economic theory tells us that as supply increases, prices will fall. If rate increases make construction so expensive that it stops being an attractive investment, prices could continue to rise. Whether or not the supply of affordable housing should depend on the profit-seeking behavior of private companies is a separate matter. Nobel Prize-winning economist Joseph Stiglitz warned policymakers that rate increases are already impacting investment in new housing construction, emphasizing that this is happening when “more supply is precisely what is needed to bring down one of the biggest sources of inflation: housing costs.” In cases where construction is built, Stiglitz also worries that “price-setters” (i.e., investors, landlords, etc.) will pass along the elevated costs associated with higher interest rates to renters. This phenomenon would also drive a new wave of inflationary pressure in the market.