The REconomy Podcast™: What Will it Take for the Housing Market to Rebalance?

In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi examine house price trends, mortgage rate fluctuations and housing supply levels for insight into what it may take for the housing market to adjust to a more balanced and a more affordable level.

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Listen to the REconomy Podcast Episode 55:


“So, while house prices may move up easily, by downside sticky, we mean that prices won't easily move down. That's because sellers would rather withdraw from the market, rather than sell at lower prices. That's one reason why we've seen home sales decline rapidly, while prices remained stubbornly high for some time. Sellers want to sell at yesterday's prices, while buyers want to buy at tomorrow's prices. But, for those that do have to or want to sell, they are meeting buyers who simply can't afford as much today given higher mortgage rates, hence the price cuts in today's market.” – Odeta Kushi, deputy chief economist at First American

Odeta Kushi - Hello and welcome to episode 55 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. Hey Mark, happy New Year. This is our very first episode of 2023. Now, we know we had a pretty tumultuous year in the housing market in 2022, from starting the year really strong and breaking record after record to a very swift slowdown in the second half of the year.

Mark Fleming - Hi, Odeta happy New Year. Yes, indeed, I would have to say if the housing market could make resolutions, it would ask for more balance in 2023.

Odeta Kushi - Well, cheers to more balance. In today's episode, we're going to talk about what it might take for the housing market to adjust to a more balanced and a more affordable market. First, let's talk about how unbalanced the housing market has been up until now and make some sense of what we're experiencing today.

Mark Fleming - And perhaps the easiest way to do that is by talking about what isn't considered balanced, you know, for example, the pandemic housing market. Recall that the housing market was already strong prior to 2020. Yet the pandemic redefined the role of a home, creating a surge in demand. As work from home became the new normal a house was no longer just a dwelling, or a vehicle for wealth creation, but also an office, a classroom, a day care, and even a gym. The broadening role of the home in American life, coupled with record-low mortgage rates and limited housing supply powered the housing market to multiple records during this unprecedented time -- the fastest annual house price appreciation in recent memory, the lowest days on market in the history of record keeping, and a near-record annualized pace of sales, I think only outpaced by the housing boom.

Odeta Kushi - That's right. Not to mention the least affordable housing market in the more than 30-year history of tracking. And, to your point, Mark, total months’ supply, which includes new- and existing-homes, of 2.3 months, which was a historic low reached in early 2022. And, just as a refresher, 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. Historically, about six months of supply is associated with moderate price appreciation. A lower level of months’ supply tends to push prices up more rapidly. So, in other words, six months of supply is usually considered a normal or balanced market.

Mark Fleming - Okay, Odeta. I just have to ask, what's the total months’ supply number today?

Odeta Kushi - It's four. Four months’ supply as of the latest November 2022 data. Inventory has increased a little bit, while sales have decreased a lot. Still not quite back to normal months’ supply -- that six-month number that I just mentioned. But the increase in months’ supply has brought with it some price declines from recent peaks, which makes sense according to our analysis. We ran a simple regression not too long ago, which showed that a one-month increase in months’ supply resulted in a 3% decline in annual house price growth. That's just a simple relationship to indicate how these two variables move together.

Mark Fleming - Well, apart from the fact that you are already talking about regressions in the first episode of the year. Yeah, a possible harbinger of episodes to come listeners. So, watch out. That seems reasonable. We are seeing price declines nationally and across many major markets, particularly in pandemic zoom towns.

Odeta Kushi - Pandemic zoom towns, maybe a quick explainer is in order. The term 'zoom town' is a play on the old-term boom town, which referred to cities that experienced large growth due to sudden prosperity. The growth was typically attributed to you know, nearby discovery of a precious resource, such as gold, silver or oil, but zoom towns are considered communities growing due to increased remote work opportunities, you know, because we use Zoom to connect remotely, you get it? Boise, Idaho is a very good example of what is considered a zoom town today.

Mark Fleming - So, Zoom is like the new gold or silver in this scenario?

Odeta Kushi - Yeah, I guess.

Mark Fleming - Exactly. And to figure out what's happening with those house prices, most analysts look to the most commonly cited house price measure, which is the S&P Case-Shiller House Price Index. We've talked about this a little bit in the past, but it bears repeating, repeating. Get it? It's a repeat sales-based index. No?

Odeta Kushi - Oh, yes, that's an eyeroll moment, but I did see it coming, to be honest.

Mark Fleming - The commonly reported S&P Case Shiller House Price Index is a lagging indicator though. There is a two-month lag in reporting such that the data reported in December will only cover home sales through October. And it's calculated monthly based on changes on home prices over the prior three months, in this case, August, September and October. In other words, they're calculating monthly using a three-month moving average. And note that these are sales prices. So, the contracts for those sales were set even earlier than that, as far back as June for the October HPI, reported in December.

Odeta Kushi - That's right. But recall that there is one key benefit to using a repeat sales index, such as the S&P Case Shiller House Price Index. It is constructed using a sales pair method, comparing the price of a house when it was sold in the current month to the price of the same house in prior transactions years ago. The advantage of this method is constant quality. Sales pair indices are designed to reflect changes in prices, while controlling for the fact that the mix of houses selling changes from period to period. Another way to say is that it measures how much it would take to buy the same unit of house over time. But back to what the data is saying. The most recent S&P Case Shiller HPI reported a 9.2% annual gain in October, down from 10.7% in September. Prices are now down 2.4% from the peak reached in June of 2022.

Mark Fleming - But here's the thing. That's still a pretty strong annual number, the historic average annual house price growth is 4.6%. So, we're still way above that.

Odeta Kushi - True, though we do know that the real-time picture is probably a bit worse. According to Altos data, 38.5% -- I have to be specific -- of properties on the market had a price cut in the latest 2023 data. That tells us that more price declines are on the way. Additionally median sale prices, according to our First American Data & Analytics data, which lead the repeat sales house price indices, but unfortunately don't account for the mix of property sold. Those have slowed to 3.2% year over year in October. Case Shiller will likely follow.

Mark Fleming - You sure that's not 3.23467987?

Odeta Kushi - I held, I held back.

Mark Fleming - We're already seeing price declines from the peak in many markets using our own First American Data & Analytics repeat sales-based house price index. We track the markets with price declines from their recent peaks. In October, San Francisco, San Jose and Phoenix all lead the way among the top 50 CBSAs.

Odeta Kushi - And, you know, we've always said that house prices are what we call downside sticky. Price stickiness refers to the resistance of a price to change. So, while house prices may move up easily, by downside sticky, we mean that prices won't easily move down. That's because sellers would rather withdraw from the market, rather than sell at lower prices. That's one reason why we've seen home sales decline rapidly, while prices remained stubbornly high for some time. Sellers want to sell at yesterday's prices, while buyers want to buy at tomorrow's prices. But, for those that do have to or want to sell, they are meeting buyers who simply can't afford as much today given higher mortgage rates, hence the price cuts in today's market.

Mark Fleming - Well, here's where you really bring up a good point talking about those buyers and sellers. Price cuts aren't exactly what sellers want. They do help with affordability for buyers, though.

Odeta Kushi - That's right. We recently wrote a blog post where we walk through one scenario for 2023 that could result in improving affordability. It's called, you guessed it, Why Housing Affordability May Rebound in 2023. We'll provide the SparkNotes version in this episode and encourage you to read the blog post for more detail.

Mark Fleming - Ever the optimist, I suppose?

Odeta Kushi - That's right.

Mark Fleming - But I have to say, in my day, aka the 1980s, they were called Cliff Notes. Sorry, it's SparkNotes. This is the hill I choose to die on. It's SparkNotes. If mortgage rates fall to 6% by the end of 2023, as the industry average predicts and household incomes remain flat on an annual basis due to the narrowing of labor supply and demand and slowing labor market as we're all sort of expecting to happen in 2023 and nominal house prices declined by a pretty modest point 3% annually as the industry forecasts, then affordability as measured by our Real House Price Index will actually improve by 9% by the end of next year compared with October 2022. Ever the optimist.

Odeta Kushi - Yes, well, given the large loss of affordability buyers experienced in 2022, a possible improvement this year will be a welcome relief for potential buyers.

Mark Fleming - I think the saying is, yeah, we'll take it.

Odeta Kushi - We'll take it. A win is a win is what they're saying these days.

Mark Fleming - A win is a win. But I imagine that the supply side of the equation will still be an issue. Remember that shortage of supply we were talking about earlier, lots of existing homeowners will still be rate-locked into their homes with that 6% market rate and the majority of home inventory is existing homes. But I digress on that point. Let's get back to affordability.

Odeta Kushi - Back to affordability, indeed. Housing affordability has always been the result of the tug of war between purchasing power, which is the product of household income and mortgage rates, and nominal house price growth. In the short run, household income doesn't contribute as much to fluctuations in the Real House Price Index or RHPI as the other two factors. But this does make me wonder between mortgage rates and house prices, which one matters more for affordability?

Mark Fleming - That's a great question. It's a good thing we looked into it, so that we could do, say a podcast episode on it.

Odeta Kushi - Whew, we did our homework before class. Well, what we found was that in the early days of the pandemic, rapid house price growth was putting upward pressure on the Real House Price Index. Remember that higher RHPI means lower affordability. Declining mortgage rates were winning the tug of war and, as a result, affordability was improving. Then, in September 2020, mortgage rates began increasing year over year, but house price growth was still the main driver of the increasing RHPI or declining affordability. By April 2022, however, mortgage rates were responsible for over 50% of the overall decline in affordability.

Mark Fleming - Alright, so this breakdown suggests that mortgage rates have a much more acute impact on affordability than house price growth. It seems to me that we should be able to calculate, dare I say, a rate-price exchange rate.

Odeta Kushi - Very clever and we sure can. Today, a one percentage point decline in mortgage rates has the same impact on affordability as an 11% decline in house prices. Historically, rates are much more likely to move by a percentage point than prices are to move by 11%. This means that, in the short run, affordability will be dictated by movements in mortgage rates. In the long run, mortgage rates, house prices and household income will adjust to find a new affordability equilibrium.

Mark Fleming - And we will start to see that rebalancing occur in 2023. House prices will likely continue to adjust downward, but it will definitely vary by market.

Odeta Kushi - And you know, the lack of inventory that we've touched on a little bit will likely put a floor on price declines. The unknown, really, is mortgage rates because they're very dependent on the path of inflation. Refer back to episode 53 of the REconomy podcast for more on that. We won't get into it today. And that's it for today's episode. 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 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.

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