Here’s where home prices are dropping the most

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Homebuyers are finally gaining leverage in the housing market, but where they can get the best discounts on home prices varies from metro to metro.

Some of the most popular pandemic boomtowns such as Phoenix and Seattle, plus perennially popular West Coast cities like San Jose and San Francisco, posted home price declines of more than 10% from their 2022 peaks, according to December data from mortgage technology and data provider Black Knight Inc. That outpaced the average national decline of 5.3%, off their June 2022 peaks.

That’s a welcome sign for some buyers who are taking advantage of newfound purchasing power and seller incentives in today’s market. Still, affordability remains a significant challenge this year, as home prices and still-high mortgage rates continue to dampen demand.

“We’re finally seeing real price corrections,” John Downs, senior vice president of Vellum Mortgage, told Yahoo Finance. “Home prices remain high, but they are better now and dropping.”

Overvalued markets will see sharpest declines

After mortgage rates surged to nearly 7% last year, home price growth began to slump across the country. As of December 2022, home prices had registered their sixth consecutive monthly decline – and Black Knight predicts those decreases will likely extend through 2023.

Approximately 14 of the 50 largest markets are already showing signs of a sharp cooldown, the report found, with home prices falling by an average 6% or more from their 2022 peaks on a seasonally-adjusted basis. Among the metros evaluated, prices declined at a sharper rate in the West.

San Francisco took the lead, with home prices there down 13% in December 2022 from their peak, Black Knight data showed. This was followed by San Jose ( down 12.7%), Seattle (down 11.3%), and Phoenix ( down 10.5%).

A sign is posted in front of new condominiums for sale on December 19, 2022 in Los Angeles, California. (Credit: Mario Tama/Getty Images)

A sign is posted in front of new condominiums for sale on December 19, 2022 in Los Angeles, California. (Credit: Mario Tama/Getty Images)

Still, home prices remain elevated for many homebuyers. For instance, the median home listing price in San Francisco was $1.3 million at year-end, according to Realtor.com, still up 3.7% year over year. However, the average home sold at $1.25 million, or 3.8% off the median listing price.

“Buyers, especially on the West Coast, know Seattle has been in a seller’s market for a decade, but they may be getting a short window to buy where they can use incentives to purchase and get ahead of the competition” Jeff Reynolds, broker at Compass and founder of UrbanCondoSpaces.com, told Yahoo Finance. “People would rather buy than wait around until there’s multiple offer competition again.”

Some markets will have a softer landing

Some markets, though, will see a more modest retreat in home prices.

According to Black Knight, only four of the top 50 markets didn’t experience any price declines, including Kansas City, Indianapolis, Virginia Beach and Louisville, while 20 markets experienced price declines by up to 2%. Twelve metros saw declines from 3% and 5% from their peaks.

A separate report from Goldman Sachs found that areas that have stronger affordability — where the monthly payment on a new mortgage costs roughly a quarter of monthly income, like in Philadelphia or Chicago — are likely to see a softer pullback in home prices compared with more expensive markets. By comparison, in the West, mortgage payments claim three-quarters of monthly income, Goldman Sachs found.

“If you’re a first-time buyer in a market like Washington, D.C., you know the last three years truly have been crazy,” Downs said. “But prices are finally easing.”

No ‘catastrophic decline’ in home prices

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A “Reduced” sign sits in the front yard of a house for sale in Northeast Washington, DC. (Credit: Drew Angerer/Getty Images)

According to Fannie Mae senior vice president and chief economist Doug Duncan, home prices will drop 6.7% over the next two years, but there won’t be a “catastrophic decline” like the one witnessed during the Great Recession.

The main concern for many economists and housing experts remains affordability.

The national payment-to-income ratio is at 34.8%, according to Black Knight estimates. While that’s down from 38.4% in October 2022, it remains above peak levels seen in 2006 prior to the Great Recession.

That means that it now takes $600, or 41%, more to make the monthly payment for a 30-year mortgage on the average priced home — after putting 20% down — compared with a year ago.

“The key question is what happens now to household incomes. If they strengthen and if employment stays reasonable, then eventually there’ll be an adjustment of the relative relationship between the incomes, mortgage rates, and home prices that will let consumers get back in the game,” Duncan told Yahoo Finance. “That’s our theme this year — it’s all about affordability.”

Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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