Will Housing Prices Flatten or Collapse?

Without the lagged shelter component, core inflation would have been up just about 0.1%, or about 1.7% annualized. That adjusted version of core inflation may be the gauge to watch in months ahead, especially if the Zillow housing index continues to converge on the target of around 5%.

Of course, one month doesn’t make a trend, and Fed policy makers probably need to see a couple other inflation reports like Wednesday’s to change their approach. Another disruption in energy markets that sends oil and gasoline prices higher would mean all bets are off.

Any such outcome would certainly lower the chances that housing prices will escape from this tightening cycle without some scars.

Meanwhile, policy makers are navigating treacherous territory. Look no further than California for an example of how fast the momentum can shift from appreciation to depreciation.

As recently as March, San Francisco Bay Area home values were still surging, and now declines in San Francisco and San Jose are among the steepest in the country as inventory quickly returned to pre-pandemic levels after a much publicized shortfall.

Until last month, the damage had been limited mostly to cities in California, plus Austin, Texas; Seattle; and Ogden, Utah. But monthly home value declines have now engulfed 22 of the country’s 100 largest metropolitan areas. They include Denver; Boise, Idaho; Phoenix; and Pittsburgh.

But nationally, inventory is still extremely tight, supporting home values for now. Households have much healthier balance sheets now than they did during the housing crisis, which means there probably won’t be a round of forced selling unless people start losing their jobs.

All of that means there’s still a chance that homeowners escape this tightening cycle with their equity intact. They just need a lot to go right.

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Jonathan Levin has worked as a Bloomberg journalist in Latin America and the U.S., covering finance, markets and M&A. Most recently, he has served as the company’s Miami bureau chief. He is a CFA charterholder.

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