Home prices registered a record high in May, but inventory remains low and affordability continues to be out of reach, according to a new report from Black Knight.
Black Knight’s latest Mortgage Monitor reported that the seasonally adjusted Black Knight Home Price Index (HPI) hit a new record high in May, with the pullback in prices late last year having now fully reversed itself.
Key highlights:
- 27 of the 50 largest markets—primarily in the Midwest and Northeast—have returned to their prior home price peaks, or set new highs this spring.
- Marking the fifth consecutive month of gains, May’s 0.7% seasonally adjusted monthly increase equates to an annualized growth rate of 8.9%, suggesting a coming inflection in annual home price appreciation (HPA).
- Annual home price growth sat at 0.1%; however, if recent trends hold true, that annual home price growth rate may turn and begin trending higher as early as next month.
- For-sale inventory improved modestly but is still 51% off pre-pandemic levels and remains a massive challenge, putting upward pressure on home prices despite Fed attempts to cool the market via higher rates.
- Inventory levels have decreased in 95% of major markets this year, with the largest swings in Western locales such as Phoenix, Arizona; Boise, Idaho; Ogden, Utah; San Francisco, California, and Colorado Springs, Colorado.
- Each of these metros had moved into inventory oversupply late last year as sales dried up, but have since swung back more than 30 percentage points year-to-date as compared to pre-pandemic levels.
- Affordability continues to suffer; as of June 22, with 30-year rates at 6.67%, the principal and interest (P&I) payment needed to buy the median-priced home rose to $2,258, marking the highest payment on record.
- Nationally, it takes 35.7% of median household income to make the average P&I payment; only income growth since fall of 2022 has kept May 2023 from being the most unaffordable month for housing in the past 37 years.
Major takeaway:
Black Knight Vice President of Enterprise Research Andy Walden commented that “There is no doubt that the housing market has reignited from a home price perspective. Firming prices have now fully erased the pullback we tracked through the last half of 2022 and lifted the seasonally adjusted Black Knight HPI to a new record high in May. Though the backward-looking annual growth rate dipped to 0.1%, May’s exceptionally strong +0.7% month-over-month gain would equate to an annualized growth rate of 8.9%, suggesting the annual home price growth rate would remain at or near 0% for only a short time before inflecting and trending sharply higher in coming months. The reheating is widespread, with more than half of the 50 largest U.S. markets seeing prices at or above 2022 peaks. While prices are still well below peak levels across the West and in many pandemic boom towns, price firming in recent months has begun to close those gaps. Austin, Texas, remains the notable exception; inventory there continues to run above pre-pandemic levels, putting downward pressure on prices, which have fallen to -13.8% below peak, the largest gap of any market. Just eight of the top 50 markets are currently more than 5% below their 2022 peaks.”
Walden concluded, “Unlike Austin, for-sale inventory is moving the other direction in much of the country. Active listings have deteriorated in 95% of major markets so far this year and, overall, we’re still down more than 50% from pre-pandemic levels. New construction starts and completions were both strong in May, which is welcome news. However, most projects underway in the month were 5+ multi-family units, as opposed to single-family residential (SFR) units. SFRs made up just 40% of the total and is now at construction levels still approximately -30% below the 2005 peak. As it stands, housing affordability remains dangerously close to the 37-year lows reached late last year, despite the Federal Reserve’s attempts to cool the market. The challenge for the Fed now is to chart a path forward toward a ‘soft landing’ without reheating the housing market and reigniting inflation. But the same lever used to reduce demand – that is, raising rates – has not only made housing unaffordable almost universally across major markets, it has also resulted in significant supply shortages by discouraging potential sellers unwilling to list in such an environment, further strengthening prices. At this point, even if rates come down, but not so sharply as to entice potential sellers out of their sub-3.5% mortgages, it could risk a widespread reheating of home prices across the U.S.”
For the full report, visit https://www.blackknightinc.com/data-reports/.
