US housing market faces mounting pressure as home prices slide

The US housing market is showing increasing signs of weakness, with back-to-back monthly declines in home prices raising the risk of a sustained downturn. Elevated mortgage rates near 7 per cent are weighing on buyer demand, even as housing supply begins to rise, marking a notable shift in market dynamics after years of pandemic-era price surges. Data released this week paints a consistent picture of deceleration. The S&P CoreLogic Case-Shiller 20-city home price index fell 0.3 per cent month-over-month in April, following a downwardly revised 0.2 per cent decline in March. On a three-month annualised basis, home prices dropped by 0.4 per cent, reflecting softening momentum despite a modest 2.7 per cent year-over-year increase, the slowest pace since August 2023.

Similarly, the Federal Housing Finance Agency (FHFA) home price index recorded a 0.4 per cent decline in April, adding to the evidence of a cooling market. These figures suggest the housing sector is beginning to feel the full effects of higher borrowing costs, with fewer buyers able to afford monthly payments at current interest rates.

Slowing momentum, rising supply

While home prices are still higher than a year ago, the rate of growth has slowed sharply. According to the Case-Shiller index, the 2.7 per cent annual price gain in April was down from 3.4 per cent in March and marks the smallest increase in nearly two years. In comparison, home prices rose by double digits throughout much of 2021 and 2022.

The number of homes for sale has also increased and is now back to pre-pandemic levels. However, the market is not flooded, with just 6 per cent of sellers reportedly at risk of selling at a loss, according to Redfin. Still, the increase in listings, combined with muted buyer demand, is forcing sellers to adjust pricing expectations downward.

This trend is further supported by the National Association of Realtors, which reported that the median sale price of existing homes has declined for five straight months on a seasonally adjusted basis. Additionally, sales of existing homes were down 0.7 per cent in May year-over-year, and the share of first-time buyers dropped to 30 per cent, well below the historical average of 40 per cent.

Regional divergence widens

The data also reflects a geographic reshuffling of price trends. Historically more stable markets in the Midwest and Northeast are now leading in price growth, while former pandemic-era hotspots in the South and West are underperforming.

Among the top-performing metro areas, New York posted a 7.9 per cent annual gain in April, followed by Chicago at 6.0 per cent and Detroit at 5.5 per cent. Conversely, Sun Belt cities that once saw record demand are now seeing declines or stagnation. Tampa experienced a 2.2 per cent price drop, Dallas saw a 0.2 per cent decline, and prices in San Francisco were flat. Miami and Phoenix managed modest gains of just over 1 per cent. The rotation reflects a shift from speculative momentum to fundamentals such as local economic conditions, affordability, and labour market trends.

Correction risks rising, but deep crash unlikely

While the data points to a market in retreat, the likelihood of a dramatic crash akin to the 2008 housing crisis remains low. Lending standards have remained tight since the Great Financial Crisis, limiting risky loans. Additionally, homeowners are not facing widespread financial distress, and most are locked into low fixed-rate mortgages from earlier in the decade.

Still, both Capital Economics and Citi Research note growing risks of an extended correction. Citi highlighted headwinds such as high rates, economic uncertainty, weakening consumer demand, and a softening labour market. Despite a generally healthy mortgage market, prolonged price softness could weigh on consumer sentiment and broader economic activity.