With interest rates on the rise, home prices have started cooling off.[1] On the one hand, the cooling of home prices in high-priced metro areas makes a home purchase more affordable, saving households nearly $50/month on a median-priced home.[2] On the other hand, falling prices also erodes the wealth (home equity gains) of current homeowners and can drive homeowners in a negative equity position (when the value of the home is lower than the remaining loan balance). How will declining home prices affect current homeowners and how does the current decline in home prices in some areas compare with the home equity gains?

The table below shows the home equity gains for homeowners who purchased a home in 2012 Q1 as of 2018 Q3. The home equity gained is the difference between the estimated value of the property purchased in 2012 Q1 in 2018 Q3 less the outstanding loan balance as of 2018 Q3.[3] Nationally, over the period 2012 Q1 through 2018 Q3, a homeowner who purchased a median-priced home in 2012 Q1 has gained $96,187 in home equity, which is equivalent to 41 percent of the estimated value of the home in 2018 Q3, at $235,119.

Of the 160 metro areas for which NAR calculates the median sales price, the metro areas where homeowners accumulated the largest home equity gains during 2012 Q1 – 2018 Q3 based on the purchase of a median-priced home in 2012 Q1 were San Jose-Sunnyvale-Sta. Clara ($591,576;56% of the estimated home value of $1.06 million as of 2018 Q3); San Francisco-Oakland-Hayward ($527,610; 57% of the current home value of $920,715); Urban Honolulu, HI ($337,013; 35% of current home value of $990,009); Los Angeles-Long Beach-Glendale ($374,565;49% of current home value of $768,634); and Boulder, CO ($329,608; 50% of current home value of $657,692).

The metro areas with the lowest home equity gains during 2012 Q1- 2018 Q3 based on the purchase of a median-priced home in 2012 Q1 were Cumberland, MD ($4,847; 6% of current home value of $79,343); Decatur, IL ($10,753; 12% of current home value of $86,302); Fayetteville, NC ($15,431; 11% of current home value of $138,627); Montgomery, AL ($17,641; or 15% of $119,252); and Peoria, IL ($17,679; or 14% of current home value of $128,818).

How do these equity gains compare with the price declines in high-cost metro areas thus far?  

We use the median list price in October 2018 on Realtor.com and look at the year-over-year change and compare these changes to the equity gains as a share of the current home values. In October 2018, median list prices declined in several high-priced metro areas compared to one year ago, but these declines are modest compared to the equity gains measured as a percent of the current home value: San Jose-Sunnyvale-Sta. Clara (-0.1%); San Francisco-Oakland-Hayward (0%); Sta. Maria-Sta. Barbara (-7.8%); Salinas ( -6%); Sta. Rosa ( -7.1%); Oxnard-Thousand Oaks-Ventura ( -2.1%). Among the 500 metros tracked by Realtor.com, the steepest decline in the median list price in October from one year ago was Denver-Aurora-Lakewood (10%).

In 301 of the 500 metro areas tracked by Realtor.com (60 percent), the median list price of homes for sale on Realtor.com were still up in October 2018 compared to one year ago.  List prices rose in areas such as Seattle-Tacoma-Bellevue where prices are more affordable than in California ($555,050; 12.1%); Boise City, ID ($330.048; 15%); Indianapolis-Carmel-Anderson, IN ($241,450; 15%); Greensboro-High Point, NC ($223,625; 14.5%);Las Vegas-Henderson-Paradise ($325,000; 14.5%), and Harrisburg-Carlisle, PA ($216,760; 14%).

In summary, homeowners have built up a sizable equity since 2012 that is larger relative to the price declines that have occurred thus far in several high-priced metro areas. Moreover, home prices are still appreciating in lower-priced metro areas. Given the strong underlying economic fundamentals in 2018— strong employment growth, the demographic boost from the 25-44 age group which includes the millennials, and safer underwriting standards and level of household debt—it does not yet appear likely that home prices will crash to a level that will wipe out this home equity gain. NAR Chief Economist Lawrence Yun forecasts no recession ahead that could cause a collapse in job growth which will impact the demand for housing.

[1] The earliest indicator of the direction of home prices—NAR’s median home prices— rose 4.3 percent in 2018 Q3, the slowest average rate for the quarter since 2012 Q1. The home price indices of the Federal Housing Finance Agency, S&P CoreLogic Case-Shiller, and the U.S. Census Bureau for new 1-family homes also show a slower price appreciation in 2018 Q3 (FHFA, 6.3%; S &P CoreLogic Case-Shiller, 5.7%; U.S. Census Bureau 1-family homes, 2.3%) compared to the pace of appreciation in 2018 Q1.In 500 metro areas tracked by Realtor.com, the median list price of homes for sale declined in 199 metro areas (40 percent), with the largest declines occurring in high-priced metro areas.

[2] At the current 30-year fixed mortgage rate of 4.83 percent with a 10 percent down payment, every $10,000 decline in home prices results in a saving of $47/month.

[3] I estimated home equity by subtracting the loan balance as of 2018 Q3 to the current home value as of 2018 Q3. I estimated the current home value by applying a home price appreciation factor using FHFA House Price Index (FHFA HPI 2018 Q3/ FHFA HIP 2012 Q1). I assumed that a homeowner purchased a median-priced home in 2012 Q1 at the average median price in 2012 Q1 of $158,333 financed by a 30-year fixed rate mortgage of 3.6 percent (2012 Q1 average) and a 10 percent down payment.

• NAR released a summary of pending home sales data showing that October’s pending home sales pace was down 2.6 percent last month and fell 6.7 percent from a year ago.
• Pending sales represent homes that have a signed contract to purchase on them but have yet to close. They tend to lead existing-home sales data by 1 to 2 months.
• All four regions showed declines from a year ago. The West had the biggest drop in sales of 15.3 percent. The Midwest fell 4.9 percent followed by the South with a decline of 4.6 percent. The Northeast had the smallest dip in sales of 2.9 percent.
• From last month, three of the four regions showed declines in sales. The West region had the biggest drop of 8.9 percent. The Midwest fell 1.8 percent followed by the South with a dip of 1.1 percent. The only region with an incline in sales was the Northeast, which had a modest gain of 0.7 percent.
• The U.S. pending home sales index level for the month was 102.1. September’s data was revised up to 104.8.

• In spite of the decline, this is the pending index’s 54th consecutive month over the 100 level.
• The 100 level is based on a 2001 benchmark and is consistent with a healthy market and existing-home sales above the 5 million mark.

The REALTORS® Confidence Index (RCI) survey[1] gathers monthly information from REALTORS® about local real estate market conditions, characteristics of buyers and sellers, and issues affecting homeownership and real estate transactions.[2] This report presents key results about market transactions from October 2018. View and download the full report here.

Market Conditions and Expectations

• The REALTORS® Buyer Traffic Index registered at 45 (60 in October 2017).[3]
• The REALTORS® Seller Traffic Index registered at 40 (45 in October 2017).
• The REALTORS® Confidence Index—Six–Month Outlook Current Conditions registered at 49 for detached single-family, 42 for townhome, and 40 for condominium properties. An index above 50 indicates market conditions are expected to improve.
• Properties were typically on the market for 33 days (34 days in October 2017).
• Seventy-six percent of respondents reported that home prices remained constant or rose in October 2018 compared to levels one year ago (89 percent in October 2017).

Characteristics of Buyers and Sellers

• First-time buyers accounted for 31 percent of sales (32 percent in October 2017).
• Vacation and investment buyers comprised 15 percent of sales (13 percent in October 2017).
• Sales of distressed properties (foreclosed or sold as a short sale) accounted for three percent of sales (four percent in October 2017).
• Cash sales made up 23 percent of sales (20 percent in October 2017).
• Eighteen percent of sellers offered incentives such as providing warranty (8 percent), paying for closing costs (8 percent), and undertaking remodeling (3 percent).[4]

Issues Affecting Buyers and Sellers

• From August–October 2018, 74 percent of contracts settled on time (73 percent in October 2017).
• Among sales that closed in October 2018, 72 percent had contract contingencies. The most common contingencies pertained to home inspection (58 percent), obtaining financing (43 percent), and getting an acceptable appraisal (40 percent).
• REALTORS® report “interest rate” and “low inventory” as the major issues affecting transactions in October 2018.

About the RCI Survey

• The RCI Survey gathers information from REALTORS® about local market conditions based on their client interactions and the characteristics of their most recent sales for the month.
• The October 2018 survey was sent to 50,000 REALTORS® who were selected from NAR’s 1.3 million members through simple random sampling and to 9,121 respondents in the previous three surveys who provided their email addresses.
• There were 3,863 respondents to the online survey which ran from November 1-9, 2018. The survey’s overall margin of error at the 95 percent confidence level is two percent. The margins of error for subgroups and sample proportions of below or above 50 percent are larger.
• NAR weighs the responses by a factor that aligns the sample distribution of responses to the distribution of NAR membership.

The REALTORS® Confidence Index is provided by NAR solely for use as a reference. Resale of any part of this data is prohibited without NAR’s prior written consent. For questions on this report or to purchase the RCI series, please email: Data@realtors.org

[1] Thanks to George Ratiu, Managing Director, Housing and Commercial Research and Gay Cororaton, Research Economist for their data analysis and comments to the RCI Report.

[2] Respondents report on the most recent characteristics of their most recent sale for the month.

[3] An index greater than 50 means more respondents reported conditions as “strong” compared to one year ago than “weak.” An index of 50 indicates a balance of respondents

who viewed conditions as “strong” or “weak.”

[4] The difference in the sum of percentages to the total percentage of sellers who offered incentives is due to rounding.