Whenever the Federal Reserve moves into quantitative tightening mode, it’s going to spell trouble for rate-sensitive sectors like the U.S. housing market. When that tightening turns aggressive because the central bank—under the mistaken belief that inflation would be “transitory”—fell behind on its inflation fight, the trouble would only be that much more intense.
As this mortgage rate shock got going back in the spring, there was debate within the housing industry as to whether it’d see U.S. home prices—which soared over 40% during the Pandemic Housing Boom—fall or simply flatline? After all, historically speaking, nationwide home price corrections are rare—with home prices moving sideways, rather than falling, following the 1981 mortgage rate shock.
Fast-forward to December, and it’s clear that the rolled-over housing cycle will indeed see U.S. home prices fall. However, this ongoing home price correction continues to vary significantly by market.
To better understand what’s happening to home prices across the country, Fortune reached out to Black Knight, and the mortgage analytics firm provided us an exclusive look at the October reading for its proprietary Black Knight Home Price Index.
Here’s what the data shows.
Out of the 51 regional housing markets tracked by the Black Knight Home Price Index, all 51 have seen local home prices fall off their 2022 peak price. This home price correction continues to hit two types of market the hardest: high-cost West Coast areas and high-growth boomtowns.
The first group comprises pricey metros such as San Francisco (-13.1%), San Jose (-13.1%), Seattle (-11.9%), San Diego (-9.5%), Sacramento (-8.4%), Los Angeles (-7%), and Portland (-6.8%). These are more rate-sensitive relative to the rest of the country, says Rick Palacios Jr., director of research at John Burns Real Estate Consulting.
The second group comprises what Moody’s Analytics calls “significantly overvalued” housing markets. Boomtowns including Austin (-8.6%), Denver (-7.8%), Las Vegas (7.7%), Raleigh (-5.6%), Salt Lake City (4.9%), and Nashville (-4.5%) simply saw home prices soar too far beyond what local incomes can support. Once the market turned over, builders and iBuyers—which make up a larger share of inventory in those places—rushed for the exits. That’s helped to intensify the downward home-price spiral in those bubbly markets.
“When the shiitake mushrooms hit the fan, you [iBuyers] want to get out first. The way to do that is to figure out where the lowest sale is, and be 2% below that. And if it doesn’t sell in the first weekend, move it down [again],” Redfin CEO Glenn Kelman recently told Fortune. “My take is that because builders and iBuyers account for more inventory, that leads to a faster correction. We’re one of them, we’re an iBuyer…what we always told investors is that we would protect our balance sheet by acting quickly. We don’t have hope as a strategy. We immediately started marking down things.”
In other words, Kelman is suggesting that real estate investors, including Redfin’s soon-to-be-closed iBuyer business, are helping to drive home prices down faster.
Speaking in front of an audience last month, Fed Chair Jerome Powell admitted that a housing bubble had formed during the pandemic.
“Coming out of the pandemic, [mortgage] rates were very low, people wanted to buy houses, they wanted to get out of the cities and buy houses in the suburbs because of COVID. So you really had a housing bubble, you had housing prices going up [at] very unsustainable levels and overheating and that kind of thing. So, now the housing market will go through the other side of that and hopefully come out in a better place between supply and demand,” Powell said.
Heading forward, economists at the Federal Reserve Bank of Dallas recommend that policymakers tread carefully with the housing bubble and deflate it rather than burst it.
“In the current environment, when housing demand is showing signs of softening, monetary policy needs to carefully thread the needle of bringing inflation down without setting off a downward house-price spiral—a significant housing sell-off—that could aggravate an economic downturn,” writes Enrique Martínez-García at the Dallas Fed. “A severe housing bust from the frothy pandemic run-up isn’t inevitable. Although the situation is challenging, there remains a window of opportunity to deflate the housing bubble while achieving the Fed’s preferred outcome of a soft landing.”
Where are home prices likely to go from here? Researchers are divided.
Nationally, the Black Knight Home Price Index finds U.S. home prices are down 3.2% through October. Zillow thinks the correction is just about over. Forecasters at firms like Moody’s Analytics and Morgan Stanley expect that national home price decline to expand to 10% before the correction runs out of steam. However, firms such as KPMG and John Burns Real Estate Consulting believe it could reach a 20% national decline if mortgage rates remain above 6% through the course of 2023. (You can find Moody’s revised home price forecast for 322 housing markets here.)
Story originally appeared on Fortune.com