How fast will the housing market cool? Projections for 48 metro areas show when prices will start to fall

Here’s the magic combination that made the 10-year bull market in housing so extraordinary: Over most of the boom, home prices galloped at record speed while inflation loped at the slowest pace in recent history. From 2011 to the close of 2021, the total “nominal” value of U.S. homes rose around 120% to around $43 trillion, and because inflation has been just 23% over that span, homeowners have effectively banked 100% “real” gains, extra wealth measured by its potential buying power for goods and services.

But now the forces that converged to create these golden times—roaring dollar appreciation and a sleepy CPI—are reversing at the same time. First, the fast-rising curve of nominal monthly increases is finally starting to trend downward. Second, Big Inflation will take a savage bite from those ebbing advances.

Of course, what your house sells for a year hence, and the outlook from there, will vary substantially based on your local housing climate. For 48 metros ranging from Cape Coral, Fla., to Riverside, Calif., Fortune projected both nominal and inflation-adjusted appreciation from the end to April 2022 to the same time in 2023, and whether the rate of increase at that point will exceed or lag the CPI. The estimates are based on data provided by the American Enterprise Institute’s Housing Center. The AEI offers detailed information on prices, appreciation, inventories, and numerous other metrics for those markets. Its director, Ed Pinto, does provide an overall view of where national prices are going in the months ahead. But AEI doesn’t furnish forecasts for individual cities. As a starting point, we follow Pinto’s outlook for the U.S. as a whole, then use the AEI’s numbers on past gains and other factors to sketch the probable trajectory for prices going forward.

Housing has just hit a key turning point

In April, the AEI’s Home Price Appreciation index (HPA) posted a year-over-year advance of 17.3%. That matches the March reading as the highest figure recorded since the series began in January 2013. Until April, HPA had been accelerating. It rose every month since last November, when it stood at an already gigantic 15.4%. Pinto’s HPA numbers are based on actual closings. But he also mines key sources that chart the future. Those are the Optimal Blue numbers gleaned from buyers who just obtained “rate locks” on new mortgages; they record the purchase prices for homes that will close in around 45 days. The rate lock data are now showing that in June, prices are set to rise 14.2%, a big slowdown from the 17%-plus in April. “We’ve seen a 33% increase in the price of similar homes since January of 2020 that has no precedent in recent history,” says Pinto. “But the fall from 17.3% to 14.2% appreciation is enough of a change to call an inflection point. That inflection point marks a major reversal, the start of falling HPA in future months.”

It’s important to note that in real terms, the rate of increase started slowing much earlier. For the 12 months ended Apr. 30, 2022, the CPI rose by 8.3%, little changed from level 8.5% in March. So the the inflation-adjusted advance was 9.0%, doing the subtraction (17.3% minus 8.3%) exercise most homeowners eschew. But last summer, prices were rocking at around 16%, yet year-over-year inflation averaged only around 5%, putting real appreciation two points higher than today at 11%. And though the projection for 14.2% in June still sounds towering, assuming the CPI keeps escalating in the 8% range, inflation would account for almost 60% of the dollar leap. “Given inflation, the appreciation numbers aren’t nearly as large as they appear,” says Pinto. “Consumer inflation is accounting for about half the rise in home prices. The role of a fast-rising CPI isn’t given nearly enough attention in getting a clear view of the housing picture.”

Fundamental forces will sustain a seller’s market for now, says Pinto

For Pinto, the easing of HPA doesn’t mean that prices, including real prices, will drop anytime soon. In fact, he believes several fundamental forces will maintain a strong market for months to come, though hardly the juggernaut of the last two years. Surprisingly, one big plus is still-attractive mortgage rates. “Even though they’re two points higher than a year ago (at 5.5%), rates are low by historical standards,” says Pinto. Besides, he adds, they’re actually negative relative to inflation, making the monthly nut look like a bargain; families are often paying less on their home loans each year than the increase in their household incomes. For Pinto, it would take a surge in rates to between 6% and 7% to cool the market big-time.

Second, Pinto points to the work-from-home revolution that has freed homeowners to relocate from expensive coastal metros to affordable Sunbelt markets and still collect their old salaries. “We’re seeing a big migration from pricy markets such as San Jose or New York to Charlotte, Boise, or Phoenix,” he says. “That housing arbitrage opportunity is driving up prices in the mid-to high end on the inexpensive markets. And that trend has staying power.”

The third and most potent factor: incredibly low inventories. “We’re still seeing a supply-and-demand imbalance, and the reason is the incredibly low number of homes for sale,” says Pinto. Purchases are waning a bit as high prices make it harder and harder for low-income folks to afford a home, and the dearth of choices discourages potential customers in all price ranges. In mid-May, the number of new purchases-to-come in the rate lock data dropped below 2019 levels for the first time this year, and buying trails the 2021 boom by a wide margin. Still, purchase volumes are higher than during most of the pre-COVID decade. That continued strength is colliding with tight inventories to keep prices humming. In April, the months’ supply of homes for sale actually dropped from 0.9 to 0.7 months nationwide, the lowest number since AEI started collecting data. The new reading is one-fifth the average of around three to four months that prevailed from 2016 to 2019. “To slow rapid HPA, you’d need inventories of around six months, and we’re miles from that level,” observes Pinto.

This is no bubble, says Pinto

A number of experts, including economists at the Dallas Fed, see sure signs that a 2005-like bubble is brewing for U.S. housing. They often cite a sharp rise in the ratio of prices to rents on single-family homes. If leasing a house is a lot cheaper than the carrying costs of owning one, families will shift en masse to renting, driving prices lower. For Pinto, that’s not a major threat. “Rents were lagging prices, but they’re catching up fast, rising now at around 17% a year and generally matching the increase for homes,” he says. “For a bubble to develop, you need to have irrational exuberance, a psychological component that prices are no longer being driven by fundamentals. That’s not the case.” He points again to the amazingly slender supply. “In the bubble of 2005, the U.S. had 2.4 to 2.5 million homes for sale in a smaller market,” he says. “Now the number is a tiny 950,000.” (To read more, see my earlier piece: “This is not the 2008 housing bubble—but one metric can tell us when the next crash is coming.”)

What metro housing prices show

A few notes about Fortune‘s model. Once again, we estimate appreciation from the end of April 2022 to the start of May 2023. By the end date, I project, nominal prices will be rising at the low end of Pinto’s range, at 7%. Hence my assumptions tilt to the downside. But I’m also foreseeing a relatively optimistic scenario where mortgage rates remain in the 5.5% range, and the U.S. avoids a recession. If borrowing costs spike, economic output craters, or both unite in a bout of stagflation, nominal prices could go flat or still rise but lag the cost of living, causing substantial “real” losses.

Given those assumptions, here’s where prices are heading in the 48 individual metros. As you’ll see, for the next 11 months or so the news is mainly excellent to pretty good.

Let’s start with the cities that have been displaying the fastest appreciation, chiefly Sunbelt addresses that, despite their boomtown status, remain affordable compared with California or the Northeast. For the year ended Apr. 30, the seven metros showing the biggest gains were Floridians Cape Coral (+36.3%) and North Port (+33%), followed by Raleigh (+27.6%), Tampa (+26.4%), Phoenix (+25.9%), Miami (+25.4%), and Las Vegas (+24.7%). Given their momentum and low numbers of homes for sale, they should all show large nominal advances by next April of between 25.4% (Cape Coral) and 17.3% (Las Vegas). Still, the inflation-adjusted increases will be much smaller than in the previous 12-month span at 7% average inflation, ranging from 18.4% for Cape Coral to 10.3% for Las Vegas.

In fact, 45 of the 48 cities should expect both positive nominal and real gains through next April. Those include high flyers such as Tuscon (13.8% nominal, 6.8% real), Atlanta (14.2% nominal, 7.2% real), Austin (16.2% nominal, 9.2% real), and Nashville (16.4% nominal, 9.4% real). The big Texas cities should perform much better than their counterparts in California. Dallas and Houston can both expect 14%–15% nominal and around 7% inflation-adjusted growth, versus 11% and 4% for L.A. and 10.3% and 3.3% for San Francisco.

The lowest-ranking cities are New York and Washington, D.C. (both 7.4% nominal, 0.4% real), Louisville (7.0% nominal, 0% real), Baltimore (6.1% nominal, -0.9 real) and Pittsburgh (5.2% nominal, -1.8% real).

What will happen to housing prices into next year?

But after next spring, things look dicier.

The best guide to the future beyond next spring: the level of "real" projected annualized appreciation on May 1, 2023. Fortune projects that fewer than 38, or over four in five, metros will see annualized CPI-adjusted numbers that run from negative to just 2%, including many that flourished during the boom. Riverside can expect 1.5% real increases, Atlanta 1.1%, Charlotte 1%, and San Antonio 0.6%. Twenty-two of the metros should face nominal increases that trail inflation, including virtually all of the old industrial cities, with Boston and Cincinnati at -2.2%, Minneapolis at -3.0%, and Oklahoma City at -3.5%.

Even in the absence of a recession or steep rise in mortgage rates, the most likely outlook after April of next year is that inflation outpaces price increases. Let's say the Fed succeeds in wrestling the CPI's trajectory to its target of 2% in late 2023 or 2024. Then even nominal increases nationwide would likely settle somewhere between 1% and 0%. Or if the CPI is still rising at 4%, home prices might be waxing at 2%. Either scenario is a distinct possibility. In the absence of a crash that does the work fast, the most likely cure for the home affordability problem is that cost of living and incomes rise faster than home prices. Big Inflation is masking a downward trend in appreciation that's already underway. Homeowners have been thumping inflation for years. By next spring, it's inflation that will do the thumping.