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U.S. housing slump is here to stay. What does that mean for Utah, the West?

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A “For Sale” sign stands in front of town houses in Sandy on Friday, Sept. 9, 2022.

Ben B. Braun, Deseret News

As the Federal Reserve continues to wage its war on record high inflation rates, it appears higher interest rates are likely here to stay for at least the next year or even longer — which means the U.S. housing market slump isn’t going anywhere anytime soon.

The impact of mortgage rates surging beyond 5% — and recently even higher than 6% — has been fast and furious. And we’re likely only seeing the beginning of its impact on home prices, though how dramatic that impact is depends on the regional market.

“There are a lot of pockets of the country that are actually weathering this relatively well — and there are pockets of the country that are not.”

That’s what Rick Palacios Jr., director of research and managing principal at John Burns Real Estate Consulting, told Fortune Magazine’s Lance Lambert on Friday during a live Twitter Spaces conversation focused on the state of the U.S. housing market these days.

Where are home prices falling?

Palacios recently penned a commentary piece for Fortune, also published Friday, that declared a “speedy escape” from today’s housing slump is “unlikely,” while reporting 98 major regional markets across the country are seeing home prices already fall, according to preliminary estimates from the Burns Home Value Index through August of 2022.

“There are markets where home prices are falling already,” Palacios said, noting that even if year-over-year home price growth is still positive, one must look to monthly data to realize “the deceleration” that’s currently happening.

The West Coast is dotted with red, according to that analysis. San Jose and San Francisco in California, both with a -8.2% home price shift since their peak. Seattle, down 7.8%. Reno, Nevada, down 5.3%. Phoenix, Arizona, down 5%.

“Our view and our outlook is for that to continue over the foreseeable future,” Palacios said. “The phrasing the Fed has been using for now several months, that housing needs a ‘reset,’ is somewhat of a euphemism for ‘home prices need to fall.’ And that’s exactly what’s happening right now.”

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Newly developed homes sit near Utah Lake in Saratoga Springs on Monday, Aug. 22, 2022.

Ben B. Braun, Deseret News

Inventory is still relatively low. So why are prices falling?

Historically, when a housing market “rolls over,” it usually takes time for home prices to actually fall, Lambert noted. “So why are we already starting to see that in two-thirds of the markets across the country?” he asked.

Palacios said the key here is that across the nation, affordability “is at or near its worst ever.” And when mortgage rates exploded from sub-3% in late 2020 to now “flirting with 6%,” that’s simply priced out many Americans from qualifying for a mortgage “because affordability just gets that bad.”

Another key to this conversation, Palacios said, is even though inventory is still relatively low, high mortgage rates have also had a dramatic impact on demand. Not only have higher mortgage rates priced out would-be buyers, but they’ve also “locked up” homeowners who purchased or refinanced during this “once-in-a-generation financing window.”

“Consider that 85% of outstanding mortgages are locked in at sub-5% rates, with 24% sitting at seductively low sub-3% levels. Good luck persuading someone to relinquish their sub-3% or even 4% fixed-rate mortgage when inflation is at a 40-year high and the cost of everything is wildly volatile,” Palacios wrote.

He also noted 64% of existing homeowners won’t purchase again if the mortgage rate exceeds 5%, citing a recent survey from the New Home Trends Institute. That percentage jumps to 85% if rates exceed 6%. Given existing homeowners account for 51% of all home purchases and an overwhelming majority require a mortgage, according to the National Association of Realtors, “any obstacle to their homebuying activity weighs heavily on total housing transactions,” Palacios wrote.

Using those figures, Palacios estimates 33% of housing transactions “could quickly vanish in the near term. At 6%+ mortgage rates, a staggering 43% of home purchases could disappear,” he wrote. “These percentages are alarming, and likely reflect today’s abysmal for-sale affordability backdrop, which remains at an all-time worst.”

So, Palacios predicts “you will see — and we’re seeing it right now — home prices fall, even though supply levels are not ripping higher. And I think that’s a pretty interesting thing that’s now starting to surprise a lot of people.”

Housing market predictions 2023, 2024

So what’s ahead? It depends on who you ask. Even though Goldman Sachs predicts the market will worsen in 2023, the banking giant still predicts U.S. home prices overall will rise slightly by 1.8% in 2023. But Palacios and his firm predict U.S. home prices will see their first year-over-year declines in 2023, Fortune reported. Same with firms including Zelman & Associates, led by Ivy Zelman — an analyst who called the 2005 housing market top and the ensuing bubble bust.

Zelman’s model predicts U.S. home prices to fall not just in 2023 — by 4% — but in 2024 too — by another 5%. But again, that will depend on the regional market, she said recently on the Macro Hive Conversations podcast.

“The risk that inventory, as fast as they’re rising and demand, again, plummeting that we could see pretty substantial price corrections. But it’s going to vary by market,” Zelman said. “And I don’t think it’s just going to end quickly. I think this is going to be a very pressured market nationally in 2023 and 2024, but it’s going to vary considerably on where that pressure is more significant than other areas.”

What does this mean for Utah, the West?

The short answer? It depends on the market. Look to Phoenix, for example — what Palacios called the “poster child” for the pandemic housing boom effect. The metro saw an explosion of buyers, investors and construction from mid-2020 until higher mortgage rates dampened the party.

That market — along with other “bubbly” pandemic frenzied markets in the West like Boise, Idaho — have been the first to see a dramatic pullback in housing market activity and an early slump in prices. In Phoenix, new construction home prices are already down 3.5% year over year, Palacios said, which Lambert noted wipes away all price gains dating back to last summer.

Last month, Boise led the nation with the largest share of sellers slashing their prices, with nearly 70% of homes for sale seeing price drops in July. Next came Denver, with 58%. Salt Lake City ranked No. 3, with 56.4%.

So what about Utah — a rapidly growing state that was already dealing with a housing shortage before the pandemic hit, but also boasts one of the strongest job economies in the nation.

Home prices started to dip for the first time in June — which the Salt Lake Chamber welcomed as a sign that the state’s home prices were finally beginning to “stabilize” after two years of insanity. Dejan Eskic, a senior research fellow at the University of Utah’s Kem C. Gardner Institute and one of Utah’s leading housing experts, said at the time it was actually welcome news in a housing market that’s been battering homebuyers for over two years.

But Friday, in another interview with the Deseret News, Eskic wasn’t as optimistic about the state of play.

Even though Utah still faces a stubborn housing shortage, even though inventory is ticking up and even though many Utahns would love to buy a home, today’s higher mortgage rates have had a nasty impact on demand.

“We’ve definitely slowed. Our prices are starting to come down because the interest rates are so volatile,” Eskic said.

After listening to the latest Fed meeting, Eskic said he’s “probably not as optimistic” because “it’s like they’re gunning out for housing now.” As rates continue to hover around 6%, that’s pricing out a dramatic number of Utahns and squeezing home builders.

Since May, when Utah home prices peaked, Eskic said home prices are down about 6% as of August, “but we’re still, you know, 10% up year over year.”

Still, considering Utah’s population growth, economic conditions, its job market, its housing shortage, Eskic doesn’t foresee a “dramatic drop” in home prices that would equal a crash.

However, demand is squelched for the same reasons Palacios discussed, including the “lock-up” effect. In Utah, about a third of existing mortgages are set on below 3% rates statewide, he said, and 45% of mortgages are set at between 3% and 4% interest rates. About 14% are between 4% and 5%, according to the FHFA National Mortgage Database.

“So 80% of our mortgages in Utah have a rate below 4%,” Eskic said. That will have big implications on Utah’s housing market activity for as long as rates stay above 4%. Especially considering forecasts that indicate mortgages aren’t likely to come down for at least the next two years.

So what does this mean overall for Utah’s housing market?

“Affordability is still an issue,” he said. “The only reason housing prices are coming down is because of interest rates.”

While it is easier, competition wise, to bid on a home compared to the wild 2020, 2021 and early 2022 markets, high prices will still block many Utahns from being able to buy a home and volatile mortgage rates will turn away even those who might be able to afford it.

While prices are starting to drop, Eskic said, “I still don’t think it’ll be enough to necessarily bring some sort of equilibrium to affordability.”