First American

The REconomy Podcast™: Welcome to the ‘Great Moderation’ of the Housing Market

In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi explain why the housing market is adjusting to a not-so-new normal pace of price appreciation – the Great Moderation.

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Listen to the REconomy Podcast Episode 46:


“Remember, prior to the pandemic, the historical average annual house price growth was just below 4%. So, the market is simply adjusting to a not-so-new normal pace of appreciation, aka the Great Moderation. But, as we start to approach these more normal levels of house price growth, some buyers who backed out due to the frenzy of the super sellers' market in the past couple of years may decide to jump back into the market.” – Odeta Kushi, deputy chief economist at First American


Odeta Kushi - Hello and welcome to episode 46 of the REconomy podcast, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hi Mark. I was just recently thinking that there's a tendency to name monumental shifts in the economy with the preface 'great.' We've got the Great Depression, the Great Recession and, recently, the Great Resignation describing the labor market, which made me think, what would we call the current shift in the housing market?

Mark Fleming - Hi, Odeta. Hmm, that's a good question. I guess my great the shift in the housing market today is a great moderation.

Odeta Kushi - Interesting, and I can definitely see why you would land on that name. The years 2020, 2021 and into early 2022 in the housing market were record-breaking years -- record-breaking house price growth, record low inventory of homes for sale and a sellers' market so intense that multiple-offer bidding wars became the norm. But today, inventory is rising, price cuts are increasing, and price growth is slowing. But there's a reason you didn't call this the great crash, right?

Mark Fleming - Right. What we're seeing in the housing market today is not a housing crash, but rather a re-adjustment to a not-so-new normal.

Odeta Kushi - Yeah, more than 20% year-over-year growth and homes with 19 offers never seemed very sustainable.

Mark Fleming - 19. That's a very specific data point, Odeta.

Odeta Kushi - Yeah, that one came from personal experience, but I digress. The past few years have been the exception, not the rule. And now the Fed is intentionally slowing the housing market. Recall that the housing market remains the key transmission mechanism for the Federal Reserve. When the economy first reopened in 2020 and the Fed cut rates, the housing industry was one of the first to take off and, of course, that drove up demand for furniture, household services, building materials, etc. And now housing is one of the industries that is contracting the fastest and the most as the Federal Reserve tightens monetary policy. But, even with the Fed's monetary tightening, we haven't seen the housing market collapse.

Mark Fleming - That's right. While we've seen sales, both existing and new, decline pretty dramatically. No question. House price growth remains persistently and unsurprisingly strong.

Odeta Kushi - It does indeed. And just to add a little bit more color on what you said about sales, existing-home sales in July declined to an annual pace of 4.81 million. Sales were down nearly 6% compared to the previous month and 20% compared to one year ago. And, importantly, the inventory of unsold existing homes rose to 1.31 million by the end of July or the equivalent of 3.3 months. Do you like my digits there?

Mark Fleming - Lots of digits.

Odeta Kushi - Yeah, lots of digits. At the current monthly sales pace, that's still well below historic levels, but up from 2.9 months in June, and 2.6 months in July of 2021. By the way, a months’ supply refers to the number of months it would take for the current inventory of homes on the market to sell given the current sales pace.

Mark Fleming - So months' supply can go up, even if there is no new inventory, but the pace of sales slows down.

Odeta Kushi - Yes, we will talk about that more in just a minute. But, first, are we seeing this in the new-home market?

Mark Fleming - Yes, and hopefully with fewer digits this time around. This shift is even more evident in the new-home market, which is more sensitive to rising interest rates. New-home months' supply is up to nearly 11 months. That's higher than the pre-pandemic five-to-six month level, which would be considered more healthy. But one should be careful when interpreting this number. You know how we like to say 'be careful when you read these numbers.' This number is higher largely because of a historically high-level of homes started, but not yet completed, that are expected to be completed in the coming months. This is because of the COVID supply disruptions. So there's much more supply quote, 'coming soon,' as they say.

Odeta Kushi - But what does inventory, or I guess in this case, months' supply mean for the great housing market moderation?

Mark Fleming - Yes. Back to the housing market moderation. Well, the absolute level of inventory remains low with only about a seasonally-adjusted 1.65 - couple of digits there - million homes on the market, new and existing. This is representing about 3.7 months of supply with the new lower level of demand. Remember, the number goes up just because there's less demand. In order to get back to the historical average of six months' supply - that's sort of the conventional wisdom that suggests neither price appreciation nor depreciation, a balance if you will - inventory would need to increase obviously. Ultimately, an increase in months' supply will prompt house price moderation.

Odeta Kushi - So a simple analysis analysis shows us that one month increase in months' supply resulted in a 3% decline in annual house price growth. And our First American House Price Index is already showing a moderation in annual house price growth. Nationally, annual house price growth peaked in March at nearly 21%, but has since decelerated to a still-robust 18.5% in June. However, the modest price deceleration is not just a national phenomenon. While house price growth has slowed in all top 50 markets we track, the pace of moderation varies significantly by market. But, before we get into those numbers, remember that you can find this data and more on our blog at Alright, let's get to the market breakdown.

Mark Fleming - All right, here we go. All top 50 markets are pulling back from their respective peaks in price appreciation. Some markets have actually decelerated much faster than others.

Odeta Kushi - And each market will have a different peak date, but it will be sometime in 2021 or 2022. So, in our June Real House Price Index report we found that the market with the strongest deceleration was Sacramento, California. Sacramento annual house price appreciation peaked in July 2021 at 23.5%, but has since slowed to 10.8%. And, according to Redfin data, months' supply in Sacramento has increased from one month supply in July 2021 to 1.6 in June 2022.

Mark Fleming - That's a pretty fast slowdown, house prices don't tend to change that dramatically. That's impressive. Then, at the other end, there's New York City, this was the market with the smallest gap between peak house price growth and its current June house price growth reading. House price appreciation in New York did not accelerate as fast as in other markets, and was well below the national peak, only reaching 13% on an annual basis at its peak in May of 2021. And it remains at nearly the same pace in June. The May 2021 months' supply in New York City was 5.4 months, not too bad. And it's actually now lower in June at 4.4 months, sort of bucking that trend. Hence the reason that New York City has not felt as much of a downward pressure on prices at all.

Odeta Kushi - And then the market with the slowest annual pace of price appreciation in June of this year was San Francisco at 6.2%. By the way, that's still pretty good, historically speaking. But it's just not what we're used to with the double-digit growth that we've been seeing. But that's down significantly from its July 2021 pace of 17.5%. San Francisco had a months’ supply of 1.9 months in July of 2021. In June of this year, it had actually increased to 2.6 months. Hence that slowdown in price appreciation.

Mark Fleming - It's crazy. We're rattling off these numbers, house price appreciation rates, 10, 15, 17%. Months' supply of one and two months. This is, as you said, not normal in the last couple of years. All right, you get the point, the lower the months' supply, the faster the appreciation and even small increases in supply at such low levels, San Francisco, as an example, can really slow price growth down.

Odeta Kushi - And some of the other top markets that are experiencing the most house price deceleration from their peak were places like Salt Lake City and Phoenix. These are also some of the markets that have experienced really strong price growth over the course of the pandemic. So now the demand is pulling back, as affordability has declined more than 50% on an annual basis, and inventories are increasing and house price growth is moderating.

Mark Fleming - But it's not always quite so black and white. The market with the fastest pace of appreciation in June was Miami at nearly 34%, which is nearly the same pace as its peak of over 34.4% in May of 2022. Yet, Miami's months’ supply of 2.7 months in May of this year was higher than many markets with lower house price appreciation. And the supply actually increased to 3.3 months in June and price appreciation hardly slowed at all. So this is not conforming with what we were just saying.

Odeta Kushi - Doesn't make a lot of sense.

Mark Fleming - And it's important to explain in this case, why. It's because of how inventory is really measured. I think it's time to talk about bathtubs again.

Odeta Kushi - Here we go.

Mark Fleming - Yes, here we go , indeed. Imagine a bathtub. Water flowing into the tub represents new listings, while water leaving the drain represents closed sales. And the water level in the tub represents the stock of inventory, pending and active, at a certain point in time. Typically, at the end of the month, is when we measure that water level. That's what we refer to as the inventory. It may be higher than the month before or it may be lower. But, just because it's higher, doesn't necessarily imply that it's because more listings flowed in. It can just as easily be because fewer sales closed and didn't flow out.

Odeta Kushi - So the primary reason today behind rising inventory is that fewer homes are selling. It's less so that there are more new listings hitting the market. In fact, First American Data and Analytics' data shows that new listings are down nearly 13% on an annual basis as of mid-August.

Mark Fleming - And wait for it. Wait for it - because we've been waiting for it for a couple of years now, when rates have finally begun to increase - that's the rate lock-in effect that we've been talking about. It's clear that sales are coming down in the housing market because of the demand pull back. But there are also fewer new listings. Remember that the housing market is unique and that the home seller is also a home buyer. If you're a homeowner today who's locked into a 2.6 or 2.7% mortgage rate, what's your incentive to sell your home and purchase a home at a higher mortgage rate today? Not much. You’re rate locked-in. And that's pulling down sales as well.

Odeta Kushi - The Great Moderation in sales. And coming back to prices. The record-breaking house price appreciation nationwide and across markets in 2021 and early 2022 was due to a supply and demand imbalance. Too much demand, too little supply. We've talked about this a lot on our podcast. But there remains a structural and long-term national supply shortage in the housing market. But, in some cities, the pullback in demand is strong and inventory is rising faster, resulting in a greater moderation of house price growth, as we've talked about today. Now, nationally, annual house price growth declines are not expected given the ongoing supply-demand imbalance and continued strength in the labor market. And, remember, prior to the pandemic, the historical average annual house price growth was just below 4%. So, the market is simply adjusting to a not-so-new normal pace of appreciation, aka the Great Moderation. But, as we start to approach these more normal levels of house price growth, some buyers who backed out due to the frenzy of the super sellers' market in the past couple of years may decide to jump back into the market. All right. Well, that's it for today. Thank you for joining us on this episode of the REconomy podcast. If you have an economics-related question you'd like us to feature on a future episode, you can email us at We love to hear from our listeners. And, as economists, you know, we love our metrics and data. So, if you enjoy listening to the podcast, please make sure to give us a rating on your favorite platform. And, as always, if you can't wait for the next episode, you can follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.

This transcript has been edited for clarity.