Higher mortgage rates are finally carving out early signs of a cooling housing market.
According to the latest S&P CoreLogic Case-Shiller report, U.S. home values increased 20.4% in April, down from the prior month’s revised climb of 20.6%. While April posted the largest jump in home price growth since the start of the data series, the pace slowed for the first time since November 2021.
The slight deceleration occurred as mortgage rates topped 5% for the first time during the last week of April, an early indication of how quickly the once-blistering hot housing market has calmed down.
While the rate of home price growth slowed marginally, it remained elevated at double the pre-pandemic pace.
That slowing suggests that “we’re at a tipping point in terms of home price growth,” Selma Hepp, deputy chief economist at CoreLogic, told Yahoo Finance Live (video above). “We do expect going forward that deceleration in home prices is going to take even a harder turn and home prices will slow down substantially by this time next year.”
'Unsustainable' pace of growth
Home prices have been rising at an unprecedented rate.
Nationwide, the average soared to a record high in April, marking the 123rd straight month of gains. The upward momentum is likely driven by eager buyers trying to lock in a favorable mortgage rate ahead of further increases.
However, higher mortgage rates are expected to slow buyer demand in coming months, according to CoreLogic. The lack of for-sale inventory and rising borrowing costs will price-out many would-be buyers.
Already, the housing market has seen fewer bidding wars as buyers feel the pinch of inflation, surging rates and sky-high home prices. According to Hepp, this should cause the annual home price appreciation to cool to 5.6% by April 2023.
“The pace of growth at 20-plus percent is unsustainable and was bringing a lot of people discomfort in terms of thinking about what happened last time around pre-Great Recession when home prices were accelerating at a similar pace as they are today,” Hepp said. “The slowing of home price growth is certainly a welcome change to the market. In theory, it should bring more balance to buyers and sellers and healthier housing market conditions.”
Cities with most and least demand
According to the Case-Shiller report, all cities registered a double-digit spike in home prices during the month of April.
The index for the largest 10- and 20-city posted a 19.7% and 21.2% annual gain, respectively. Home price growth was particularly strong in smaller markets, as remote workers with larger budgets swapped big cities for more affordable areas near the southeast region of the U.S.
The report found that the cities with the largest price growth were Tampa, Miami, and Phoenix, with yearly growth rates of 35.8%, 33.3%, and 31.3%, respectively.
“We’ve seen a lot of people moving because of the availability of work-from-home policies,” Hepp said. “I do think that higher home price growth in the South will continue.”
On the other hand, once popular cities such as Seattle, San Francisco, and San Diego reported the largest declines in price growth compared to March.
Minneapolis and Washington, for instance, had the slowest annual gains ranging from 12.3% to 13%. Still, these cities experienced double-digit growth rates for the 17th consecutive month.
According to CoreLogic, the slowdown in these areas is likely due to a buildup in active inventory and fewer buyers rushing to make offers, resulting in an uptick in the number of homes that have listed price reductions to attract price-sensitive buyers.
“Lots of the homes in the Northeast are now becoming relatively more affordable than they were before because the demand has dampened,” Hepp said.
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.