According to the latest reading by the Freddie Mac House Price Index, 77 of the nation’s 100 largest housing markets saw prices rise between June 2022 and June 2023 while 23 major markets were down year-over-year.

The 10 markets up the most are largely concentrated east of the Rockies: McAllen, Texas (+11.8%); Knoxville, Tenn. (+8.3%); Omaha, Neb. (+8.1%); Hartford, Conn. (+8.0%); Rochester, N.Y. (+7.8%); Syracuse, N.Y. (+7.8%); New Haven, Conn. (+7.2%); Allentown, Pa. (+7.1%); Augusta, Ga. (+6.9%); and Oklahoma City, Okla. (+6.9%).

Meanwhile, the 10 markets experiencing the most significant declines are predominantly located out West, or in the states of Texas and Hawaii. That includes Boise City, Idaho (-10.5%); Austin, Texas (-10.2%); Phoenix, Ariz. (-6.5%); Honolulu (-5.1%); Las Vegas (-5.0%); Ogden, Utah (-3.8%); Stockton, Calif. (-3.7%); Provo, Utah (-3.5%); Sacramento, Calif. (-3.5%); and Spokane, Wash. (-3.3).

Why has the housing market been so divided over the past year?

It comes down to the fact that numerous housing markets in the Western region, such as San Francisco and Denver, exhibit heightened sensitivity to interest rates. These Western housing markets not only have a significant concentration of rate-sensitive industries, particularly the tech sector, but their elevated home prices in relation to local rents and incomes render them more susceptible to corrections in prices triggered by mortgage rate shocks. The frothy home prices were a consequence of a pronounced housing shortage spanning a decade in the Western region, coupled with a simultaneous tech boom that propelled Western markets to outperform their Eastern counterparts between 2012 and 2021.

In the eastern half of the country, fundamentals such as house price-to-rent ratios were less skewed. This relative affordability, combined with the presence of less rate-sensitive industries, provided a cushion for eastern markets, mitigating housing declines during the housing correction that occurred in the latter half of 2022.

While 23 of the nation’s 100 largest housing markets are down year-over-year, according to the June reading of the Freddie Mac House Price Index, only 3 of those markets saw a month-over-month decline between May 2023 and June 2023 (see chart down below). Of the nation’s 100 largest housing markets, 97 markets saw a month-over-month home price increase between May 2023 and June 2023.

In the first half of 2023, the tailwind created by the lack of existing inventory was strong enough to overpower the headwind created by deteriorated housing affordability. At least in most markets.

Does that mean that home prices have essentially bottomed? Several firms think national house prices have bottomed, including the AEI Housing Center, CoreLogic, and Zillow. However, economists at Moody’s Analytics and Morgan Stanley think national house prices have a little further to fall, and it’ll happen as the housing market exits the seasonally strong window (i.e. the first half of the year) and moves into the seasonally weaker window (i.e. second half of the year).

The latest forecast model produced by Freddie Mac predicts U.S. house prices will fall by 2.9% this year, and 1.3% in 2024. However, economists at Freddie Mac appear to have low confidence in their own model.

“Given the current housing market conditions with historic low inventory and an early read on our data, we will likely revise our [negative] home price forecast in the next iteration…We expect tight inventory will push sales volume down, and we expect it to keep [national] home prices up,” wrote Freddie Mac economists in July.

In the chart below:

MoM (month-over-month) = house price change between May 2023 and June 2023

YTD (year to date) = house price change between December 2022 and June 2023

YoY (year-over-year) = house price change between June 2022 and June 2023

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