Due to Interest Rate Hikes... US Housing Prices Fall for the First Time in 10 Years

(Photo by WSJ)

[Asia Economy Reporter Yujin Cho] U.S. home prices, which saw a sharp rise during the COVID-19 pandemic, have fallen for the first time in 10 years. This appears to be a sign that the Federal Reserve's (Fed) aggressive interest rate hikes have begun to burden the housing market with higher borrowing costs.

According to the S&P CoreLogic Case-Shiller Home Price Index, a nationwide U.S. home price index, the average home price across the country fell by 0.3% in July compared to the previous month. This marks the first monthly decline in home prices since March 2012, a span of 10 years.

During this period, San Francisco experienced the largest drop at -3.6%, followed by Seattle (-2.5%) and San Diego (-2%).

The Wall Street Journal (WSJ) analyzed that the first decline in home prices in a decade signals that the increased mortgage interest rates due to rate hikes are starting to weigh on the housing market.

In response to inflation following the end of the pandemic, the Fed accelerated the pace of rate hikes, including three consecutive giant steps (raising the benchmark interest rate by 0.75 percentage points at a time), causing mortgage interest rates this year to more than double compared to the pandemic period.

According to Freddie Mac, a U.S. mortgage company, the average 30-year fixed mortgage rate stood at 6.29% as of the close on September 22, a significant rise from 2.88% a year earlier.

Steven Stanley, chief economist at Amherst Pierpont, commented, "The cooling of the housing market is happening quickly and strongly."

Experts expect the upward trend in home prices to slow significantly by the end of the year. In a recent report, Zillow Group stated, "Considering the outlook for a worsening macroeconomic environment, home prices may continue to decline."

However, most experts agree that it is still too early to say that home prices have entered a sustained downward trend. Bloomberg News reported signs of still strong suppressed demand for housing, such as a sharp increase in new home sales in August exceeding expectations. The annual home price index rose to 18.1% as of the end of July, up from 15.8% the previous year.

Meanwhile, as housing demand stagnates and the construction industry enters a downturn, lumber prices are returning to pre-pandemic levels. On this day, lumber futures closed at $410.80 per board foot (a plank measuring 1 inch thick, 1 foot long, and 1 foot wide). This is about one-third lower than the same period last year and has plunged more than 70% compared to the peak in March.

Lumber prices, which had been driving inflation along with other raw materials, began to fall rapidly after the Fed's aggressive rate hikes cooled the real estate market since this spring. Since March, building permits for residential construction have continued to decline, suggesting that lumber demand is unlikely to recover anytime soon.