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ArlingtonReal EstateUh-oh: Region's housing values seen as declining for next year

Uh-oh: Region’s housing values seen as declining for next year

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Analysts at Zillow have for much of 2022 been among the most bullish, expecting housing prices to hold steady and even rise despite the downturn in market conditions.

But their thinking now is, in the Washington area at least, a pricing downturn is not only here, but could be here for a while.

The typical Washington-area home value declined 0.6 percent from July to August, twice the national dip of 0.3 percent, and now is expected to remain down for at least a year, according to figures reported Sept. 20.

While the Zillow analysts still expect a national housing recession to be brief (with prices down for perhaps six months before a turnaround), the year-out forecast for the D.C. region sees home values down 1.3 percent year-over-year in August 2023, even as the national year-over-year rate is projected to be a positive 1.2 percent.

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Washington, which ranks as the sixth largest metro area in the Zillow ranking, is in good company. The most populous areas – New York City, Los Angeles and Chicago – all are projected to have lower home values a year from now. The fourth and fifth largest, the Texas areas of Dallas-Fort Worth and Houston, are expected to have higher home values.

(“Home values” are not, in this analysis, the same as sales prices; Zillow uses its own proprietary methods to come up with valuations.)

In August, the typical Zillow home value in the Washington year was $551,504. The good news: That’s up 6.4 percent from a year before, owing to market conditions in late 2021 and 2022. But the July-to-August decline is an indication that homebuyers are being more choosy and not bidding up properties – in many cases because they can’t afford to.

Mortgage-interest rates that are back in the rise are a major culprit.

“Substantial day-to-day and week-to-week rate movements mean that many potential buyers are able to qualify for a loan one week, but not the next, or vice versa,” said Skylar Olsen, chief economist at Zillow. “Even buyers able to afford a house at current rates could feel frozen, waiting for mortgage rates to fall dramatically again, like they did from the end of June to mid-July.”

As the share of median household income needed to pay monthly mortgage costs now stands beyond the 30-percent level considered to be a financial burden, uncertainty itself could be holding up a large population of buyers who could otherwise still afford to move forward with a loan. It’s likely that this problem will continue until markets stabilize and return to some semblance of normalcy, Olsen said.

With the 0.3-percent decline from July to August, the typical U.S. home value now stands at $356,054 in Zillow’s estimation. The July-to-August dip marks the largest monthly decline since 2011 and follows on the heels of a 0.1-percent decrease from June to July.

That said, don’t be too terribly alarmed: While appreciation has receded since peaking in April, typical home values are still up 14.1 percent from a year ago and 43.8 percent since August 2019, before anyone had ever heard of COVID.

But the rise in home prices over the pandemic, combined with this year’s spiking mortgage rates, have pushed the monthly mortgage payment on a newly-purchased typical home, including insurance and taxes, from $897 in August 2019 to $1,643 in August 2022 – an 83 percent increase.

Reduced competition has homes lingering on the market. Typical time before a listing goes under contract is now 16 days, three days more than in July – a steeper increase than the market usually sees this time of year – and up from an all-time low of six days in April.

A significant decline in the flow of new listings to the market over the past two months indicates that the slight rise in total inventory is the result of homes taking longer to sell, rather than extra selling activity.

Mortgage rates hovering around 6 percent are likely dissuading many owners from selling their current homes and entering the market as buyers, since they would prefer to hold on to current homes (and mortgages at rock-bottom rates).

Affordable markets in the Midwest are generally retaining their heat while competition is cooling most rapidly in Western markets, especially those that either cost the most or saw the most extreme appreciation over the pandemic.

Home values rose from July to August in 12 of the 50 largest U.S. markets, led by Birmingham (0.9%), Indianapolis (0.5%), Cincinnati (0.4%) and Louisville (0.2%). Those four each have a typical home value well under $300,000. More pricey Miami was in fifth position.

Values fell the furthest month over month in San Francisco (-3.4%), Los Angeles (also -3.4%), Sacramento (-3.2%) and Salt Lake City (-2.6%).

Sellers appear to be coming to grips with the new market conditions and listing their homes accordingly. The share of listings with a price cut rose by just one percentage point since July, compared with much steeper hikes in preceding months.

The share of listings with a price cut were highest in Salt Lake City, Phoenix, Las Vegas and Austin. Markets with the lowest rates of price cuts were Milwaukee, New York, Hartford and Boston.

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