Cotality December HPI reveals structural shifts

Transcript:

Allie Barefoot: Welcome back to Data in Context. I'm Allie Barefoot with Cotality. This episode is a part of a mini-series that we have on this channel where we break down Cotality's monthly Home Price Index report. As 2025 ends, the housing market isn't just slowing down—it's fundamentally changing. For years, unsustainable growth fueled by momentum defined the narrative. But now, that frantic pace has been replaced by moderation, a necessary rebalancing that urges a new approach from every stakeholder.

The data is clear. National price appreciation has plummeted to 1.1%, the lowest rate since 2012. The bigger trend is regional. Price drops have spread from just six cities to 32 across the Mountain West, California, and Texas. So today, we'll talk with Cotality's Chief Economist, Dr. Selma Hepp, to give us a recap of what the 2025 housing market looked like and what we can expect next year. Let's go ahead and jump into today's questions with Selma.

Allie Barefoot: Selma, as always, thank you so much for joining us again on Data in Context.

Dr. Selma Hepp: Thanks so much for having me, Allie, again.

Allie Barefoot: I cannot believe it's the last week of December. This year has completely flown by. So, I kind of want to take a quick look back on 2025 because the numbers, they tell a clear story of a slowdown here. 1.1% national growth, 32 metros seeing price drops. How should we understand this period? Is 2025 truly the year the housing market is headed towards healing, or is this moderation simply a lull before another unpredictable chapter?

Dr. Selma Hepp: You know, what happened during the pandemic, we saw a significant dislocation in the housing market. You know, we saw the swings in home prices, we saw incredible competition among buyers, we saw inventory drop to historical lows, mortgage rates, you know, all over the place. So there were significant dislocations, and it will really take some time for all of this to reset to some level of normalcy.

And I think that's what we're experiencing at the moment. We're experiencing a continued moderation and a gradual movement towards trends that we saw pre-pandemic, which is the last period that we consider to be sort of a normal for the housing market.

Allie Barefoot: Selma, we know that normalcy is a very broad term that we can use in the housing market, but national appreciation has slowed according to the monthly Home Price Index report. Yet in many markets, prices aren't falling dramatically. Cotality experts have actually noted that sellers are choosing to hunker down rather than lower their prices to really meet those market needs. How significantly is this seller psychology affecting both the inventory and that national appreciation figure?

Dr. Selma Hepp: Seller behavior is pivotal. You know, we are seeing sellers hunkering down and unwilling to cut prices, which has restrained inventory growth. After a significant increase in inventory earlier this year, we have seen more and more sellers delist their properties, which has slowed down the pace of normalization of availability of inventory, but has also put a floor under home prices. So, even though the demand cools, these discretionary sellers have prevented steep declines in home prices because they pulled back their inventory. And so, as a result of that, we have seen nationally appreciation slow to 1.1%, but has not really went negative in terms of nominal growth. So it's still positive. And this rigidity that you're referring to among sellers is reducing liquidity, meaning that there's not as many transactions as we would like, but it's holding a floor under home prices, meaning that the softening demand is not resulting in significant decline in home prices.

Allie Barefoot: And Selma, Cotality data shows the lock-in effect is suppressing national supply. But regionally, we're now seeing price drops spread to 32 metros. Fueled by slowing in-migration, as Cotality data noted, residents are moving out of state about 15% less frequently than they did about 5 years ago. Which force is currently dominating the moderation—the nationwide supply constraint or the sudden drop of regular buyer demand?

Dr. Selma Hepp: Right, we are seeing both trends play out at the moment. The lock-in effect is a primary national constraint, right? When you think about it, 80% of mortgages still carry really low mortgage rates, those below 6%, while the current rate is above 6%. It's continued to range between 6.2% and 6.4%. So this "great stay," some have been referring to, is keeping resale inventory tight, even though inventory has increased significantly in some regions. In those regions which have seen a significant increase in inventory, we have also seen regional demand slowing, and so that's why those price declines have spread to more to more markets and are driven in large part by slowing in-migration to those markets and also affordability fatigue.

Allie Barefoot: Right, and you mentioned about the mortgage rates. Obviously, that's a big pressure on a lot of homeowners and home buyers. And beyond the mortgage rate, you know, escrow costs, insurance, property taxes—they've also been rising sharply, creating more pressure on these homeowners. Is the factor now becoming a more significant headwind to overall affordability than the home price itself?

Dr. Selma Hepp: I think the issue applies to both new home buyers and existing home buyers because existing home buyers are right now are facing what we call the "escrow shock," which comes from insurance premiums rising as much to 40% to 60% over the last 5 years—in some markets even more—and are projected to continue to increase into 2026. And property taxes as well, rising some 30% overall over the last 5 years nationally. And so this is the escrow payment shock for existing homeowners who were sort of betting on consistent mortgage payment, or fixed mortgage payment, over the duration of their homeownership. For new homeowners, those high levels of additional payments that they have to come up may be preventing them from entering the market, even though for them there is an additional burden of much higher home prices than they were 5 years ago in light of having also much higher mortgage rates at the moment.

Allie Barefoot: That makes perfect sense, Selma. And as we kind of take a look into 2026, what's a critical indicator—economic or behavioral—that you're going to be watching in the first quarter of 2026 to kind of signal whether we're going to have another year of moderation, or if that re-acceleration of home prices is something that we're just going to have to brace for?

Dr. Selma Hepp: Right, so the critical thing to watch out for here is mortgage rates—what happens to mortgage rates. If mortgage rates remain elevated, you know, it will, you know, slow the rate of that gradual improvement that we are hoping for. But if mortgage rates drop more significantly than currently anticipated, that may fuel some additional demand and may fuel home price appreciation beyond what we're expecting. So it's really about mortgage rates.

But what mortgage rate, if mortgage rates could help in terms of sort of behavioral dynamics, is they could help with consumer sentiment. Consumer sentiment has been really, really low this year, and people are really feeling down and out. They're worried about everything costing so much more. And if mortgage rates do come down relatively faster than what we currently anticipate, it could make potential buyers feel a little bit better, and they would rush in.

But then again, you have these opposing forces where, you know, mortgage rates do make things a little bit more affordable, but a rush of buyers would mean stronger home price appreciation. So, really, the ending result for affordability is uncertain.

Allie Barefoot: Absolutely, and it's just going to have to be something that we're going to have to monitor moving into 2026. But obviously, I feel like I speak for most homeowners when I say we're rooting for affordability! (laughs)

Dr. Selma Hepp: Absolutely.

Allie Barefoot: Selma, thank you again for taking the time to talk with me again on Data in Context, and I look forward to talking with you in the first quarter of 2026 to really see where those forecasts are going and what homeowners and home buyers can expect next year.

Dr. Selma Hepp: Sounds good, I look forward to it as well, and Happy Holidays!

Allie Barefoot: Happy Holidays, Selma.

Allie Barefoot: Selma, thank you so much again for joining Data in Context, and thank you guys for listening. If you haven't already, go on ahead, subscribe to the YouTube channel. And if you want to find out more information, as always, head to cotality.com/insights.