Weekly Economic Trends & Indicators
The Headline
A report this week by the real estate firm Redfin stated that the total value of U.S. homes fell by $2.3 trillion from June to December 2022 (decline of 4.9%). Even so, most metropolitan areas around the country ended the year with a net increase in home values from January to December 2022.
The Local Details
National trends in home values can be somewhat misleading to residents of the Midwest, as the characteristics of the housing market here are quite different from those on the coasts. The National Association of Realtors reported that average home value appreciation over the last three years (2019-2022) was about 22.1% ($31,100) in the Davenport-Moline-Rock Island MSA.
The Context
Extremely low interest rates provided the incentive for many people to move into a higher valued home and for many renters to buy their first home. The increase in remote and hybrid work arrangements facilitated a move out of the urban core towards the suburbs. Some people who are able to work remotely all of the time even moved to other parts of the country, pushing up demand in specific locations.
As interest rates have increased in the last year, the affordability of mortgages decreased and began to bring that demand back down to more normal levels. As a result, home prices have begun to fall, especially in those areas that were on the leading edge of the demand increase of the last couple years.
How much of a difference does the rise in mortgage interest rates make? Increasing the mortgage rate from 3% to 7% (roughly the change from their pandemic lows to today) on a $150,000 mortgage will add $4,392 per year to the payments. It is not surprising that this is having the cooling effect the Federal Reserve desires in order to bring inflation under control. Expect demand to continue to slow down through 2023 both nationwide and locally due to higher interest rates.
On the plus side, the Quad Cities area continues to enjoy a very reasonable ratio of home prices to income. According to the Joint Center for Housing Studies at Harvard University, the median sale price of an existing home was just 2.31 times median household income (2017 data). This makes our area quite affordable for the average household compared to other parts of the country. For comparison, many areas of the south and west have ratios higher than 4, with prices in southern California and the San Francisco Bay Area topping out at greater than 8 times household income. This data was collected prior to the recent increase in prices, so these values could be even higher today in the high demand areas.
Next week: Housing market update.
