Where will housing prices end 2022? New data predicts a 4% drop in 5 months—and homes with these two characteristics will be hardest hit

For Pinto, the impetus driving that downdraft is fundamental. “It doesn’t help that so many people from California and Seattle are moving to less expensive cities because of the work-from-home revolution,” Pinto told Fortune. “But that exodus has been happening for years, and it was inevitable it would accelerate as prices kept jumping. The key factor is lack of affordability that’s been building for a long time, and got much worst in the pandemic.” In San Jose, average prices soared from $1.3 million from Q2 of 2020 to well over $1.6 million this spring. In that span, San Diego went from $695,000 to the $940,000 range, and Seattle leapt from $600,000 to the roughly $850,000.

By comparison, the Sunshine State, though it’s lost momentum, is proving remarkably resilient. Every one of the eight Florida cities in Pinto’s universe occupy the top ten in year-over-year HPA. In July, all of them kept waxing, with Tampa and Miami up 1.1%, and Deltona making one of the nation’s best showings at a positive 3.1%. Florida’s big plus is that though prices have risen steeply, its offerings remain highly affordable versus most of the other coastal markets. In Q2 of this year, the average home in Jacksonville fetched $392,000, well below the national average of $457,000. Despite near nation-leading HPA in recent months, Deltona still rates as the state’s cheapest major market at a norm of $354,000. The Midwest and East Coast are generally faring well. Heartland cities have stayed relatively inexpensive (Cleveland, Columbus, Pittsburgh), and even New York, Boston and Washington, DC didn’t witness the Brobdingnagian appreciation that so hammered the competitiveness of the big western metros.

Second trend: The high end takes the brunt of the blow

Pinto recently unveiled an extraordinarily informative new metric. The measure parses his data to show the up-close, month-over-month performance of the different price tiers. Pinto deploys the AEI’s standard breakdown into four levels, low, low-medium, medium-high, and high. Buyers in the first two categories benefit greatly from credit sponsored by the FHA, Fannie Mae, and Freddie Mac. Shoppers in the two “high” swaths typically obtain “portfolio” loans from banks that don’t provide the specially favorable terms bestowed on the government-backed mortgages.

During the pandemic, “medium-high” and “high” outperformed the two lower brackets. That’s highly unusual in a housing bonanza. The reason, says Pinto, is that the sharp fall in mortgage rates disproportionately boosted the high end. “Expensive home are much more sensitive to rates than those in the lower tiers,” says Pinto. “When rates rise, lower income buyers can still obtain FHA, Fannie and Freddie mortgages. That’s because those lenders still allow buyers to qualify even when their debt-payment to income ratios go much higher. The people buying pricey homes don’t benefit from that latitude. They’re in the free housing market. The private lenders’ debt to income standards are fixed, and don’t increase. The buyers of expensive homes don’t drink from the punchbowl the Fed is spiking as people in ‘low’ and ‘low-medium.’” As rates rise, folks eyeing expensive homes can’t secure the bank loans that require much higher downpayments and impose far more stringent debt-to-income bogeys than those faced by lower income borrowers.

From January to March of 2022, “high” and “medium-high” each rose at an average monthly rate of over 2%, beating both “low” and “low-medium.” But starting around May, the housing hierarchy reversed. In July, the two upper designations both dropped; “high” fell 1.9%, building on a 0.9% decline from May to June. The government-supported lower end kept chugging. For July, “low” rose 1.6% versus June, and “low-medium” climbed 0.7%. “The biggest deceases going forward will come in the expensive part of the market,” says Pinto. “Of course, many of the priciest houses are on the west coast, which has an especially serious affordability problem.” But because higher rates exercise a much stronger pull in the upper rungs of any metro, he adds, the class that’s been the trendsetter over the past two years will lead the charge lower from here, at least in the next few months.

Pinto adds that the tough outlook for the top tiers doesn’t pose a big threat to the overall market. “The people who bought those homes have the lowest unemployment rate and highest, steadiest incomes,” he says. “They won’t default on their mortgages. If they put their home up for sale and prices drop, they can take the house off the market, keep living there, and wait for a rebound.” The hazard to watch is falling demand at the lower bands that account for the vast bulk of sales. And since prices there have also boomed, and are still rocking, that downswing is looming. “As demand falls because affordability further deteriorates in the two bottom categories, you’ll see more foreclosures that will add to supply,” says Pinto. Families will increasingly economize by renting instead of buying, expanding the time it takes to sell, and swelling inventories. Although expensive homes are taking the first hit, the mainstream market will eventually spearhead the downward spiral

Third trend: Prices will fall for the rest of 2022

How rapid will that spiral be? Using his new metrics, Pinto makes an estimate using simple math. In addition to following the actual closing numbers through July, Pinto charts the future by deploying numbers from Optimal Blue. That home loan data platform reports contract prices when purchasers “lock” their mortgages. Those figures enter the public record in 45 to 60 days later. The preview from Optimal Blue allows Pinto to accurately forecast HPA for August and September. He then extrapolates those dots to predict where housing finish 2022.

Pinto now predicts that by the December holidays, average home prices will hover around 6% higher than 12 months earlier. But the first seven months of 2022 are already in the can, and they show a total gain of 10% from January through July. To register a 6% increase for the year, prices must fall 4% over the next five months. That course would mark a severe reversal from the ever-rising tide of the last few years. And the drop will be anything but consistent across America. “The declines in the West will continue to be the most severe,” says Pinto. “The high end will also continue to be hit hardest.” So far, America faces nothing resembling an outright crash. But for the average homeowner, it will hardly bring cheer that the closer they get to the holidays, the more they’ll be watching the value of their cherished ranches and colonials fade.