Mortgage rates across the country are surging, from just 3% in September 2021 to 7.33% as of Wednesday. However, house prices have not responded uniformly, leading to a fascinating divergence in housing markets across the country. It’s really a tale of two real estate markets, one hot at the bottom and one cold at the top.
In many regional housing markets, prices for high-end homes fell while lower-end homes remained relatively unaffected.
Seattle and San Francisco, two markets known for their high-priced housing markets, exemplify this stark contrast in home values.according to Zillow Home Value IndexHome prices at the “high end” in Seattle and San Francisco plummeted 10.7 percent and 13.4 percent, respectively. Meanwhile, “lower priced” home prices fell much less, with declines of just 1.5 percent in Seattle and 4.1 percent in San Francisco.
How is this going? Homebuyers are merely adjusting their expectations as housing affordability worsens nationwide amid rising mortgage rates. With many buyers unable to reach the upper echelons of the market, they are turning their attention to smaller and lower-priced homes. By doing this, they keep the bottom half of the market relatively warm.
Additionally, many relocation buyers looking to trade their 3% or 4% mortgage rate for a 6% or 7% rate opted to stay in their current home. This therefore results in less demand flowing into the “higher price tier” while simultaneously reducing the supply available in the “lower price tier”.
Lower-priced homes have been outperforming high-end homes in recent months.
Of the 40 largest housing markets across the country tracked by Zillow, 29 of the markets’ “upper price tiers” are still below the peaks seen during the pandemic, while 23 markets have yet to return to their “middle price tier” peaks. In contrast, only 10 markets are in the “lower price tier,” still below the peak of the pandemic.
In other words, 30 of the nation’s 40 largest housing markets set record highs for “low-priced” housing in July, underscoring the enduring appeal of more affordable housing options.
We’re also witnessing this regional divergence, as high-cost Western markets like Phoenix and San Francisco saw overall price declines outpace more affordable Midwestern markets like Cincinnati and Chicago. Notably, home prices in 11 markets, including Cincinnati and Chicago, set new all-time highs across price tiers in July. A big reason for this shift is that individuals and investors who were priced out of markets like San Francisco and Austin are turning their attention to cities like Chicago, Cincinnati and Kansas City.
In other words, there is a “relative affordability” run in the first half of 2023. This resulted in lower-priced markets experiencing larger price increases, and “relatively affordable markets” outperforming lower-priced markets in terms of price increases.
Note: “Lower Price Tier” reflects the typical value of homes in the 5th to 35th percentile range tracked by the Zillow Home Value Index. The “Median Price Tier” reflects the typical value of homes in the 35th to 65th percentile range. The “upper price tier” reflects the typical value of homes in the 65% to 95% range.
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