Laurelhurst neighborhood along Lake Washington in Seattle. Getty Images
Mortgage rates rose uniformly across the country, rising from just 3% in September 2021 to just 3% in September 2021. 7.33% as of Wednesday. However, the response from housing prices has been far from uniform, resulting in a striking disparity in the country’s housing market. It’s actually a tale of two housing markets, one blazing hot at the bottom and the other icy cold at the top.
In many regional housing markets, high-end homes have seen price declines, while entry-level homes have remained relatively unscathed.
Seattle and San Francisco, two markets known for their high-priced housing markets, exemplify this stark contrast in home values. According to the Zillow Home Value Index“Higher tier” home values fell by 10.7% and 13.4%, respectively, in Seattle and San Francisco. Meanwhile, “lower price bracket” home values saw more moderate declines, with declines of just 1.5% and 4.1% in Seattle and San Francisco, respectively.
What’s going on? As housing affordability across the country deteriorates under the weight of rising mortgage rates, homebuyers simply adjust their expectations. With the upper levels of the market out of reach for many buyers, they have turned with interest to smaller, lower-priced homes. In doing so, they kept the bottom half of the market relatively warmer.
Furthermore, many bullish buyers, who would trade a 3% or 4% mortgage rate for a 6% or 7% rate, have chosen to remain in their current homes. Thus, this results in a reduced flow of upward demand into the “higher price tier,” while at the same time reducing the supply available in the “lower price tier.”
In recent months, lower-priced homes have consistently outperformed their higher-end counterparts.
Of the 40 largest housing markets in the country tracked by Zillow, 29 are still below their pandemic-era price peaks in the “upper price class,” while 23 have not yet regained those peaks in the “middle price class.” In contrast, only 10 markets remain below the peak of the epidemic in the “lower price tier.”
In other words, 30 of the nation’s 40 largest housing markets posted all-time highs for “low-priced” homes in July, underscoring the continuing appeal of affordable housing options.
We’ve also seen this pronounced regional bifurcation, with high-cost western markets such as Phoenix and San Francisco seeing overall price declines more than affordable Midwestern counterparts such as Cincinnati and Chicago. Remarkably, home prices in 11 markets, including Cincinnati and Chicago, reached all-time highs across price levels in July. An important reason for this shift is that individuals and investors who have been shut out of markets like San Francisco and Austin are reorienting their focus toward cities like Chicago, Cincinnati and Kansas City.
In other words, there was a run for “relative affordability” in the first half of 2023. This resulted in lower price levels yielding larger price gains and “relatively affordable markets” outperforming their less expensive counterparts in terms of price increases.
Note: The “lower price stratum” reflects the typical value of homes tracked by the Zillow Home Value Index in the 5th to 35th percentile range. The “mid-price class” reflects the typical value of homes in the 35th to 65th percentile range. The “top price class” reflects the typical value of homes in the 65th to 95th percentile range.
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