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M REPORT | 45 O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST DATA Nation's Longest Home Price Boom Ends After a Decade The American Enterprise Institute's Housing Center reports all of the 60 largest metros analyzed experienced significant declines in home prices in November, marking the end of the longest home price boom on record. A ccording to new data from the American En- terprise Institute's (AEI) Housing Center, the na- tion's longest home price boom has ended after 10½ years. Nationally, prices have declined 3.1% from the peak in June. While all 60 largest metros have begun experiencing year-on-year price declines, San Jose, Seattle, and San Francisco have led the way with declines of 15.5%, 13.4%, and 12.7% from their peaks. November's year-over-year Home Price Appreciation Index (HPA) was 6.7%, down from 8.5% a month ago, a year-over-year peak of 18.3% in March 2022 and 16.7% a year ago. Based on Optimal Blue rate lock data, year-over-year HPA is projected to decline further to 5% in December 2022 and 3% in January. "The year-over-year decline in HPA continued in November with a rate of 6.7%, down from March 2022's record pace of 18.3%," Senior Fellow and Director of AEI Housing Center Ed Pinto said. "All of the 10 fastest HPA metros were in the South (seven in Florida), and all of the 10 slowest HPA metros were in the West (San Jose, San Francisco, Seattle, Sacramento, Phoenix, Salt Lake City, Colorado Springs, Portland, Los Angeles, San Diego)." Year over year, the HPA varied significantly among the 60 largest metros. It ranged from 2.6% and 5.8% in San Francisco and San Jose to 17.8% and 15.0% in Miami and North Port. "Home prices in November increased a stunning 13.3% in Cape Coral, but it may con- tinue as a leader due to a massive supply-demand imbalance, at least over the near term," Research Fellow and Assistant Director of AEI Housing Center Tobias Peter said. "Cape Coral is still relatively affordable compared to many other Florida and California markets. At the other end of the spectrum, San Francisco and San Jose have had the most dramatic slowdown and are among the first to show year- over-year declines." Historically, HPA in the low-price tier outpaced HPA in the upper- price tiers. This trend continues to hold true. Although home prices were down across all four price tiers, the high end and low end of the market were hit differently. In November, the high-price tier was down 4.6% from its peak in May 2022, while the low-price tier was down 3.1% from its peak in July. November's months' supply and active listings both increased above seasonal trends but remain at his- torically low levels. Months' supply stood at 2.5 months in November 2022, down from three months in November 2019, but up from 2.1 months in October 2022, and 0.9 months in May 2022. The months' supply for the high-price tier came in at 6.2 months in November 2022, helping the price weakness for this tier. The national month-over-month HPA in November was -0.9%, and it is expected to keep declining in December and January based on the Optimal Blue data. Regardless of seasonality, home prices seem to have peaked in all largest 60 metros. Year-over-year, HPA is expected to slow to 5% and 3% for December 2022 and January 2023. market likely won't crash like in 2008. While the housing market looks to be softening as buyer demand dissipates, it still doesn't seem as though we're likely to see a 2008-style crash in 2023— even if 41% of Americans expect a crash this year. Owing to how strong many of the housing market's fundamentals have remained—like borrowers' abil- ity to make their payments on time—the housing market (even in the face of high inflation) doesn't appear at serious risk of a total meltdown. » Home price growth will moder- ate, and even come down in some areas. Though declines in home prices are often seen as more of a negative than a positive, declines this year may not be all bad news. This is especially true for buyers who may be struggling to keep up with persistently high prices. For those worried about price declines, it's worth noting that because home values have increased so much over the past few years, current homeowners will likely be able to hold onto most of the home equity they've built, even if prices come down. » Inflation will likely come down. Inflation remained persistently high through 2022, much to the dismay of economic policymak- ers and consumers alike. There does seem to be some evidence that inflation has just about peaked and could soon start slowing down more significant- ly—at least in the United States. Even though inflation will likely remain somewhat elevated in 2023, it shouldn't be as bad as in 2022. » Supply chains should improve. In 2023, supply chain issues are poised to get better, especially as major manufacturing nations like China reduce pandemic- related restrictions. This doesn't mean supply chains will return to how they were before the pandemic, but it suggests that transporting raw materials and goods will be less of a challenge in many instances. » Interest rate growth should moderate. The Fed will likely continue to hike rates over the coming months. But if inflation starts to wane, we could see an end to the aggressive rate-hike policies implemented through much of 2022. While this doesn't necessarily mean rates will come down—barring a major reces- sion, the Fed is unlikely to start reducing rates even if they stop hiking them—it will nonetheless be good news for those strug- gling to keep up with rising rates. Of course, rates could come down on some products not directly tied to the federal funds rate, like mortgages. Potential Economic Downsides » A recession could be on the ho- rizon. Owing to various factors from a softening labor market to the Fed's aggressive rate strategy, a recession hitting sometime in 2023 or early 2024 is a real possibility. However, a recession isn't the end of the world. If one does hit, it'll likely be mild. » The housing market will remain prohibitively expensive for many. Even though home prices seem like they're going to come down in 2023, or—at the very least—stop rising, that doesn't mean housing will become af- fordable for everyone. Especially for lower-income borrowers, the housing market will likely remain a tough nut to crack for quite some time. » Home sellers could face challeng- es. In 2020, 2021, and even earlier parts of 2022, sellers enjoyed a sig- nificant amount of leeway in the market. This trend already started to reverse in the latter half of 2022 and will likely continue into 2023. While this could be seen as good news for some buyers, it'll likely be less than ideal for sellers who may find their homes are taking longer to sell and need to make more concessions to buyers than they'd prefer. » The labor market will soften. Though unemployment remains low, there are signs the labor market is softening. As the year continues, though, it's likely that more people will be laid off and the unemployment rate will increase.