Home prices are decelerating as the housing market downshifts, according to a new report from First American Financial. 

With affordability reduced, some buyers are pulling back from the market forcing sellers to adjust their price expectations, according to First American Financial’s March 2022 First American Real House Price Index (RHPI) report. 

“The housing market is slowing down by design as the Federal Reserve tightens monetary policy in order to tame inflation,” said First American’s chief economist Mark Fleming. “Early data signals the housing market is normalizing — our preliminary nominal house price index for the months of April and May indicates annual house price growth is decelerating.”

Fleming said the rapid annual affordability decline was driven by both a 21.6% annual increase in nominal house prices and over a full percentage point increase in the 30-year, fixed mortgage rate compared to a year prior.

Plus he said, even though household income increased 4.9% since March 2021 boosting home-buyer power, it wasn’t enough to offset the affordability loss from higher mortgage rates and fast-rising nominal prices.

“Reduced affordability prompts some buyers to pull back from the market and sellers to adjust their price expectations,” Fleming said. 

But while mortgage rates and declining affordability were two defining trends so far in the 2022 housing market, the effect mortgage rates have on home prices is not so straightforward. Fleming says, more often than not, home price appreciation has been resistant to rising mortgage rates. 

The report also found price appreciation is likely to remain, but its pace will normalize. 

“History has shown that rising mortgage rates may take the steam out of rising house prices, but they don’t necessarily trigger a decline,” Fleming said. “In today’s housing market, demand for homes continues to outpace supply, which is keeping the pressure on house prices, so don’t expect house prices to decline.”

But don’t expect the tight market to loosen up anytime soon. The imbalance of supply and demand continues to keep the pressure on when it comes to home prices. 

Despite the slowdown, real home prices continued to rise in March, up 32.5% year over year, the fastest growth in more than 30 years according to the report. 

“House prices don’t fall just because mortgage rates rise,” Fleming said. “Rising mortgage rates do influence house prices, but broader economic conditions are often more influential. The Federal Reserve is purposely trying to slow the housing market in order to tame inflation, and early indications, based on our preliminary house price index, signal a normalizing housing market.”