U.S. home prices grew substantially in May, but that growth was slower than the previous period, meaning home values are still overvalued in 89% of the country's metro areas.
As mortgage rates remain elevated, and housing inventory increase, unsupported rapid home price growth could moderate in the second half of 2022, according to Fitch Ratings.
On a year-to-year basis as of May 2022, home prices grew annually by 19.8% and were overvalued by, according to Fitch. The May reading compares with the peak price growth of 20.6% in April 2022, the rating agency said, citing the Case Shiller Home Price Index. In a separate valuation, home valuations grew by about 8.8% in May on a year-to-year basis, Fitch said.
Further, Fitch noted that national home prices were overvalued by 11.0% for 1Q22 on a population-weighted average (WA) basis, compared with 9.2% in 4Q21. Housing affordability could continue to deteriorate, as mortgage rates and home prices continue to escalate, Fitch analyst Jian Mao wrote in the report, "U.S. RMBS Sustainable Home Price Report."
Affordability narrows with inflation, rate movement
Homeownership has proven to be more difficult as prices and borrowing rates increase, according to Fitch. As of August 4, the 30-year fixed mortgage rate was 5.0%, slightly off of its peak of 5.8% in June. For that month, Fitch estimated, mortgage payments were 25% of income, the rating agency said.
Not only did this exceed the highest level seen during the Great Financial Crisis, but appears to be the fallout of two major forces at work in the economy right now: the Federal Reserve's rate raising campaign to rein inflation, and a Consumer Price Index that appears to be stuck at historic highs.
The U.S. Bureau of Labor Statistics reported on Wednesday that the Consumer Price Index rose 8.5% over the last 12 months, unchanged from June.
This comes just several weeks after the Federal Reserve raised overnight borrowing rates by 0.75 basis points. In remarks days after the move Federal Reserve Chairman Jerome Powell noted that markets are working in an orderly way, and that employment and economic activity still paint a decent picture. Powell did, however, note concern for average Americans—and those existing on the lower end of the income spectrum—who are suffering from the effects of high inflation.
Members of the middle class and those who are better off might have some resources to absorb price increases, Powell noted, but many people do not have those resources.
"We understand how painful it is," Powell said. In response, the that realization, he added, "We are assigned uniquely and unconditionally the obligation of providing price stability to the American people. And we're going to use our tools to do that."
Meanwhile, Fitch noted that purchase applications are signaling a weaker housing demand. Home purchase activity plummeted to the lowest level since 2015, Fitch said, citing the Mortgage Bankers Association's purchase index. The index had declined by 18% in June 2022, compared with a year ago.
