Home price growth is cooling down, FHFA finds

While home prices are elevated compared to one year ago, home price growth has slowed, affording buyers some leverage, reports show. 

Home prices surged 17.7% on an annual basis in the second quarter this year, according to the Federal Housing Finance Agency's House Price Index, but that was a deceleration from 18.7% over the prior three months. On a quarterly basis, housing costs increased by 4%, down from 4.6% three months earlier, with a noticeable trend emerging at the end of the second quarter, according to William Doerner, supervisory economist in FHFA's division of research and statistics.

Between May and June, housing prices only rose by a seasonally adjusted 0.1%, compared to 1.3% a month earlier, according to the FHFA. In a change deemed "noteworthy" by Doerner, declines were seen in five out of nine U.S. census divisions. Monthly costs in June fell the furthest in the Mountain division at 0.9%, followed by West North Central states, which experienced an 0.7% decline. Prices in the Pacific dropped 0.6%.

All nine divisions also posted a slower monthly pace when compared to their peak monthly appreciations earlier in 2022.

"The last time we had more than five divisions report negative monthly gains was in May 2020, when COVID-19 caused a severe disruption," he said on FHFA's YouTube channel. "But before that point, we have to go all the way back to January 2012, prior to when house prices began their steady ascent."

At the same time, a separate survey of sellers conducted by Realtor.com also indicates a clear shift in market conditions favoring buyers. Approximately 31% of sellers said they sold below asking price in July and August, up from 18% in February and March, when interest rates were more than 2% lower on average.

"The combination of higher mortgage rates and prices have noticeably cooled demand over the first half of the year," said George Ratiu, manager of economic research at Realtor.com, in a press release.

"In addition, as more homeowners have been listing their properties, rising inventory is motivating more of them to resort to price cuts in order to successfully close transactions."

Buyers are seeing benefits beyond just lower prices. An overwhelming majority — 92% of Realtor.com's respondents who sold their home within the past year — said they accepted some buyer-friendly terms, with 41% approving contingencies regarding appraisal, home inspection, home sale or financing. Almost one-third, 32%, said they had dropped prices because the home failed to meet appraisal. 

Thirty-two percent also said they funded some of the buyer's closing costs, while 29% paid for repairs after appraisal. 

Where many homes were being sold without an inspection in the heated housing market of a year ago, 95% of buyers asked for one between July and August, and 67% requested repairs be made based on the results. By comparison, only 82% of buyers expected inspections before February, with 31% asking for repairs. Meanwhile, sellers who refused to make repairs fell between the two periods from 8% to zero.

Although they currently have less leverage, sellers are still seeing a profit, thanks to the steep gains in property values over the past two years. 

"Even as we are seeing a shift toward a more buyer-friendly market, it's worth noting that the majority of recent sellers are still satisfied with the outcome of their home sale," Ratiu said.

Despite the regional slowing and price cuts, the quarterly uptick nationwide marked the 42nd consecutive quarter the U.S. housing market saw positive annual appreciation, according to the FHFA's House Price Index. It was also the seventh straight quarter of double-digit percentage growth in home prices.

Prices increased between the second quarters of 2021 and 2022 in all 50 states and the District of Columbia, with prices surging the most in the South Atlantic census division at 23%. On a state-by-state basis, the Sun Belt experienced the greatest growth in values, with Florida, Arizona and North Carolina leading the country at 29.8%, 25.5% and 24.3%, respectively.