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Home Prices Are Still Rising As Housing Market Faces ‘New Reality’—A Recession Could Force Big Drops In These Major Cities


The good news for buyers is that there was a slight deceleration in home prices in May as higher interest rates continued to temper demand in the booming housing market, according to industry data released Tuesday, and experts say there’s plenty of room for the downtrend to continue—particularly in many pandemic-era housing hotspots.

Key Facts

Home prices across the country skyrocketed 19.7% in May on an annual basis, but cooled from 20.4% one month earlier after prices in March spiked at the highest rate in 35 years, according to the closely watched S&P CoreLogic Case-Shiller Indices.

Prices in the nation’s largest cities are starting to decelerate as well, with the Case-Shiller 20-City Index, which measures prices in cities such as New York, Los Angeles and San Francisco, climbing 20.5%, from 21.2% in the previous month.

“The market is adjusting to a new reality,” Pantheon Macro chief economist Ian Shepherdson said in a note about the release, while noting the Case-Shiller index reflects data from two months ago and that recently lower sales volumes and increased inventories mean the “true state of the market is far weaker.”

Some markets will be most vulnerable to a decline: In a Tuesday report, Redfin senior economist Sheharyar Bokhari noted home prices soared at an “unsustainable rate” in many housing market hotspots during the pandemic and warned a recession could ultimately unravel the gains, saying: “What goes up must come down.

“Though he believes most homeowners are likely to remain on solid footing, Bokhari notes that places where people tend to have high debt relative to their income and home equity are vulnerable because residents are more likely to foreclose or sell at a loss.

As a result, Riverside, Calif. has the highest chance of seeing its market cool during a recession, according to Redfin, followed closely by areas including Boise, Cape Coral, Florida, Las Vegas, Phoenix and Tampa, which reported the highest year-over-year gains among the nation’s largest cities in May (skyrocking 36.1%), per S&P.

Crucial Quote

“Boise’s market is already turning around, as a lot of the people who moved to Idaho during the pandemic are either moving back to their hometowns or cashing in and moving to more affordable places,” Redfin agent Shauna Pendleton said in a Tuesday statement. “I don’t expect home values to plummet, but we do need to come down from the clouds at some point and sellers need to adjust their expectations to the new reality.”

Key Background

Historically high savings rates, government stimulus measures and low interest rates helped ignite a home buying frenzy during the pandemic, but signs of a slowdown have quickly emerged as the Fed embarks on its most aggressive interest-rate hiking cycle in two decades. With demand quickly falling, the number of homes for sale nationwide saw its first annual increase since July 2019 last month, according to Redfin. “There are more homes on the market, fewer buyers, and a higher chance that buyers can’t pay the asking price because their monthly payments have shot up due to rising rates,” says Pendleton.


Some markets are less at risk of a decline. Akron, Ohio has the lowest chance of a downturn in the event the economy enters a recession—thanks to low home-price volatility, a low debt-to-income ratio among residents and a relatively cooler housing market, reports Redfin. Other areas with less risk include Philadelphia, Cleveland and Boston.

Further Reading

Home Prices Surge 20.6% In Biggest Spike This Century—And Experts Say It’s Unclear When They’ll Drop (Forbes)