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The Housing Market Is Starting to Cool Down – and It Could Get Worse

Last Updated September 25, 2020 3:01 PM
Stephanie Bedard-Chateauneuf
Last Updated September 25, 2020 3:01 PM
  • The rise in May home prices was slightly slower than in April.
  • Prices could continue rising during the summer due to low supply and high demand.
  • Home prices could drop in 2021 as foreclosures increase.

The U.S. housing market showed signs of slowing in May. While home prices kept rising, they did so at a slower pace than they did in April. This is likely due to the brief but sharp slowdown in home sales caused by the pandemic.

Home Prices Rose at a Slower Rate in May

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index  reported an annual gain of 4.5% in May, down from a 4.6% gain in April. Home prices in the 10-city Composite increased 3.1% annually, down from 3.3% in the previous month. The 20-City Composite posted a gain of 3.7% year-over-year, down from 3.9% in April.

home prices may
Home prices rose by 4.5% annually in May, down from 4.6% in April. | Source: S&P Dow Jones Indices 

Phoenix, Seattle, and Tampa had the highest year-over-year gains among the 19 cities (excluding Detroit) in May.

Craig J. Lazzara, an executive at S&P Dow Jones Indices, said: 

More data will obviously be required in order to know whether May’s report represents a reversal of the previous path of accelerating prices or merely a slight deviation from an otherwise intact trend. Even if prices continue to decelerate, that is quite different from an environment in which prices actually decline.

The National Association of Realtors (NAR) reported last week that the median price of existing homes was $295,300 in June , up 3.5% annually, as prices increased in each region. Housing inventory totaled 1.57 million units in June, up 1.3% from May, but still down 18.2% from a year ago.

So far, home prices have mostly remained insulated from the pressures of the pandemic.

Falling mortgage rates have boosted housing demand among homebuyers. At the same time, the supply of homes for sale across the country remains severely limited.

The gap between the demand for housing and the country’s inventory has pushed prices up. Many potential sellers put off listing their houses due to concerns about the state of the economy, worsening the shortage.

Home Prices Could Continue Rising in the Short-Term

The gap between supply and demand explains why many economists say home prices will continue to rise even if the labor market takes another hit from the pandemic.

Mark Fleming, chief economist at title insurer First American, wrote in a report released Monday: 

Even under a pessimistic outlook for the labor market, the housing market would benefit from a house-buying power boost as mortgage rates are likely to be pressured lower. In this case, house price appreciation remains strong, but doesn’t accelerate. The supply and demand imbalance that existed entering the pandemic has persisted, and even worsened, meaning house price growth will likely remain strong this summer.

The Housing Market Could Take a Hit in 2021

Home prices might continue to grow in the summer and during the rest of 2020. They probably won’t continue to rise forever, though.

There are signs that home prices could end up falling. According to the Federal Housing Finance Agency (FHFA) House Price Index, U.S. house prices fell 0.3% May .

Prolonged economic damage due to the pandemic could cause home prices to drop in 2021. Federal regulators have offered a forbearance option to anyone with a mortgage backed by Freddie Mac, Fannie Mae, or Ginny Mae, preventing jobless homeowners from going into foreclosure. Forecasters predict house prices will start to drop next summer when the forbearance year is about to expire.

Frank Nothaft, an economist with CoreLogic, says: 

There’s a lot of uncertainty out there. When we look at the mortgage market in particular, we have a lot of concerns that we’re going to see a spike in delinquencies and foreclosure rates as we get into 2021.

CoreLogic expects nationwide home prices to decrease by 6.6%  year-over-year by May 2021.

Home prices will probably decline first in major cities as Americans are fleeing towards the suburbs.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com.