A tale of two housing markets: the hot bottom and the cold top

Laurelhurst neighborhood along Lake Washington in Seattle. Getty Images

Mortgage rates rose uniformly across the country, rising from just 3% in September 2021 to just 3% in September 2021. 7.33% as of Wednesday. However, the response from housing prices has been far from uniform, resulting in a striking disparity in the country’s housing market. It’s actually a tale of two housing markets, one blazing hot at the bottom and the other icy cold at the top.

In many regional housing markets, high-end homes have seen price declines, while entry-level homes have remained relatively unscathed.

Seattle and San Francisco, two markets known for their high-priced housing markets, exemplify this stark contrast in home values. According to the Zillow Home Value Index“Higher tier” home values ​​fell by 10.7% and 13.4%, respectively, in Seattle and San Francisco. Meanwhile, “lower price bracket” home values ​​saw more moderate declines, with declines of just 1.5% and 4.1% in Seattle and San Francisco, respectively.

What’s going on? As housing affordability across the country deteriorates under the weight of rising mortgage rates, homebuyers simply adjust their expectations. With the upper levels of the market out of reach for many buyers, they have turned with interest to smaller, lower-priced homes. In doing so, they kept the bottom half of the market relatively warmer.

Furthermore, many bullish buyers, who would trade a 3% or 4% mortgage rate for a 6% or 7% rate, have chosen to remain in their current homes. Thus, this results in a reduced flow of upward demand into the “higher price tier,” while at the same time reducing the supply available in the “lower price tier.”

In recent months, lower-priced homes have consistently outperformed their higher-end counterparts.

Of the nation’s 40 largest housing markets tracked by Zillow, 29 remain below pandemic-era price peaks in the “upper price tier,” while 23 have yet to regain those peaks in the “middle price tier.” In contrast, only 10 markets remain below the peak of the epidemic in the “lower price tier.”

In other words, 30 of the nation’s 40 largest housing markets posted all-time highs for “low-priced” homes in July, underscoring the continuing appeal of affordable housing options.

We’ve also seen this clear bifurcation regionally, with high-cost Western markets like Phoenix and San Francisco seeing overall price declines greater than their more affordable Midwestern counterparts, like Cincinnati and Chicago. Remarkably, home prices in 11 markets, including Cincinnati and Chicago, reached all-time highs across price levels in July. One important reason for this shift is that individuals and investors who were excluded from markets like San Francisco and Austin are redirecting their focus toward cities like Chicago, Cincinnati, and Kansas City.

In other words, there has been a run on “relative affordability” in the first half of 2023. This has resulted in lower price levels delivering larger price gains and “relatively affordable markets” outperforming their less expensive counterparts in terms of price increases.

Note: The “lowest price tier” reflects the typical value of homes tracked by the Zillow Home Value Index in the 5th to 35th percentile range. The “middle price tier” reflects the typical value of homes in the 35th to 65th percentile range. The “highest price tier” reflects the typical value of homes in the 65th to 95th percentile range.

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