Home prices declined to finish 2022 but owners are still flush with equity

WASHINGTON (TND) — Home values that reached record highs during the coronavirus pandemic housing boom are starting to cool off, costing homeowners in the U.S. trillions in equity earned over the last few years.

The total value of U.S. homes dropped 4.9% in the second half of the year from a record high of $47.7 trillion in June to $45.3 trillion at the end of the year, according to a Redfin report. It was the largest decline in percentage during that timeframe since 2008.

However, the total value of U.S. homes was still up 6.5% from a year earlier in December, the smallest annual increase during any month since August 2020.

Homebuyer demand has declined over the last year as mortgage rates have gone back up along with the Federal Reserve’s interest rate hikes to combat inflation. Mortgage rates are not directly affected by the Fed’s benchmark rate but are influenced by increases because they tend to track the yield on 10-year Treasury notes that are influenced by investors’ expectations and demand for them.

Existing home sales have declined for 12 consecutive months as more buyers have sat on the sidelines from being priced out of the market or being unable to find a home to meet their needs.

The slump in sales has brought on a decline in value from peaks reached last year. The median home sale price in the U.S. was $383,249 in January, an 11.5% decline from the peak reached last May.

Overall, homeowners are still going to come out ahead of the slump in the housing market.

The housing market has shed some of its value, but most homeowners will still reap big rewards from the pandemic housing boom,” said Redfin economics research lead Chen Zhao. “The total value of U.S. homes remains roughly $13 trillion higher than it was in February 2020, the month before the coronavirus was declared a pandemic.”

Even with 2022’s declines, housing prices are still up considerably compared to any other year and are considered unlikely to drop beneath pre-pandemic ranges.

“It is unlikely they will fall to below pre-pandemic levels, but it's not unreasonable to think they may ‘correct’ to where they might have been had there been no pandemic. That said, the overall nature of housing in the U.S. is lots of demand relative to supply,” said W Ben McCartney, assistant professor of commerce at the McIntire School and a faculty affiliate of the University of Virginia Center for Real Estate and the Built Environment. “Higher mortgage rates at the end of 2022 dampened this demand somewhat. But the demand for homes is not going away, and supply is still lagging.”

The nation’s housing supply is still well short of meeting demand, meaning there is a higher floor for the price of a home. In addition to not having enough homes built to satisfy demand, some homeowners have been hesitant to sell their current homes because they are locked into a much lower rate than what they could get in the current market.

The average rate on a 30-year fixed rate mortgage, the most common type of home loan, sat at 6.5% for the week ending Feb. 23, Freddie Mac said Thursday. That is 2.61% more expensive than a year ago, which adds hundreds of dollars a month to a mortgage payment.

Homebuilders have voiced concerns throughout the pandemic and the reemergence of the U.S. economy about inflation for building supplies and a labor shortage increasing their costs, which are then passed onto buyers or make funding projects less feasible.

Home starts have picked up in recent months but are still not enough to satisfy the long-existing shortage. The ongoing push and pull between supply and demand could mean relatively stable values as a shortage of homes keeps prices elevated and construction being finished preventing rapid growth.

“The upshot is that house prices are somewhat limited in how far they can fall just because there are so many people who still want them and are willing and able to buy them,” McCartney said. “But, at the same time, the large number of new homes that should finish construction over the coming year should also prevent the kind of crazy house price growth we saw in 2021 and 2022.”

The declines are also being felt differently across the country. Only a handful of areas saw year-over-year declines, which were some of the hottest markets during the pandemic-era boom.

California’s Bay Area took the biggest hits over the last six months of 2022. San Francisco had the largest decline at 6.7%, followed by Oakland losing 4.5% and San Jose at 3.2%. Only three other metro areas saw year-over-year declines: New York at 1%, Seattle with a 0.4% decrease and Boise, Idaho losing 0.3%.

The difference in equity also changes among age groups. The total value of homes owned by millennials rose by 26.7% year-over-year during the third quarter, followed by an 18.4% bump for Generation X and a 12.9% increase for Baby Boomers. Redfin said millennials are gaining the most value mostly because they are in prime homebuying age, resulting in more homes being purchased and creating more equity.