Home prices fall for first time in 10 years in July as mortgage rates climb

Sep. 27, 2022 12:45 PM ETToll Brothers, Inc. (TOL), PHM, DHI, RMAX, COMP, EXPI, Z, RDFN, HOUS, KBH, LENBy: Liz Kiesche, SA News Editor98 Comments

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The Federal Reserve's 300 basis points of rate hikes this year are starting to impact the economy by reducing demand. And nowhere is that more apparent than the housing market.

With the U.S. central bank signaling rate hikes early this year, mortgage rates started climbing even before the Fed raised rates. Now, the average 30-year fixed rate mortgage is 6.29%, up from 2.88% a year earlier. With demand slipping, home prices are following suit. The S&P CoreLogic Case-Shiller House Price Index fell 0.4% on a month-over-month basis in July for the first time in 10 years.

On a year-over-year basis, the increase in home prices decelerated by the most in the index's history, said Craig J. Lazzara, managing director at S&P DJI.

The FHFA House Price Index also reflected the softness, dropping 0.6% in July vs. June, and weaker than the consensus for 0% change.

Surprisingly new home sales rose in August, up almost 29% to 685K homes sold, exceeding the 498K expected. That may be the result of homebuilders trimming prices to spur sales. The median sales price fell to $436.8K from $439.4K in July.

Homebuilder Lennar (NYSE:LEN) last week said it's focusing on pricing to offset the effect of higher mortgage rates. It expects an average sales price of $475K-$480K in its fiscal Q4, down from $491K in Q3 ended Aug. 31, 2022. KB Home (NYSE:KBH) also forecast lower ASP for the final quarter of its fiscal year — to $503K from the $508.7K it reported for Q3.

Don't expect the bottom to drop out of the housing market, as housing supply is still low by historical standards and lenders have held their credit standards tight compared with lending standards before the 2008 crisis.

Overall, real estate brokerage stocks are faring well in Tuesday trading. Anywhere Real Estate (NYSE:HOUS), formerly Realogy, rose 2.5% in midday trading, Redfin (NASDAQ:RDFN) +2.1%, Zillow Group (NASDAQ:Z), +0.7%, eXp World Holdings (NASDAQ:EXPI) +6.4%, and Compass (NYSE:COMP) +3.3%. Re/Max (RMAX), however, has dipped 1.4%.

Homebuilder stocks, meanwhile, are largely in the red. D.R. Horton (NYSE:DHI) -0.4%, KB Home (KBH) -1.0%, PulteGroup (NYSE:PHM) -0.6%, Toll Brothers (NYSE:TOL), -0.4%, and Lennar (LEN) +0.5%.

Home prices are likely to stay under pressure as the Fed isn't done raising rates yet.

"As the Federal Reserve continues to move interest rates upward, mortgage financing has become more expensive, a process that continues to this day," said S&P DJI's Lazzara. "Given the prospects for a more challenging macroeconomic environment, home prices may well continue to decelerate."

Earlier, St. Louis Fed's Bullard sees more rate hikes ahead as inflation poses a "serious problem."

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