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Home values plunge in some U.S. cities as mortgage rates rise

Housing market correction could come soon
MoneyWatch: Potential housing market correction could come soon 04:25

Some of the largest U.S. cities in the West have seen their home values plunge this summer, a trend that economists say favors house hunters.

The typical home value dipped 0.3% nationwide from July to August and 0.1% from June to July, Zillow said in a report this week. It is the largest monthly decrease since 2011. Los Angeles, Sacramento and San Francisco in California experienced some of the sharpest decreases, with each city recording a 3.2% or higher drop. Salt Lake City, Utah, and Seattle, Washington, also saw steep declines of 2.6%.

Residential real estate values are falling in those cities because they've "hit an affordability ceiling," Zillow senior economist Nicole Bachaud told CBS MoneyWatch, adding that "demand is pulling way back."

With less competition for a home, today's buyers are likely to find more property choices, Bachaud said. That also often makes it easier to negotiate a better price, while sellers are less likely to ask buyers to waive certain contingencies, such as a home inspection, she added. 

The typical U.S. home is now valued at $356,054, according to Zillow. The real estate website also found that Birmingham, Alabama; Cincinnati, Ohio; Indianapolis, Indiana, and Louisville, Kentucky, saw home values rise by less than 1%. That's because houses in those areas have been valued $300,000 or below and are now trying to climb closer to the $365,054 benchmark, Zillow said. 

Home values are an important bellwether of how home prices might trend in the short-term. If values increase, home sellers often ask for a higher price. When home values drop, the same homeowners will likely lower their asking price. 

In recent months, homeowners have been doing much more of the latter, economists said. Home prices have fallen by thousands of dollars as sellers face a dwindling pool of potential buyers. One in five homeowners dropped their prices in August, according to The housing website also reported that the average national home price dropped from $449,000 to $435,000 between July and August, marking the biggest month-to-month drop since 2016.

How mortgage rates affect housing market as Federal Reserve weighs new interest rate hike 03:29

Homebuyers flooded the market earlier this year, back when mortgage rates were around 3%, causing demand and home prices to skyrocket. Mortgage rates have now climbed to more than 6%, forcing may potential buyers to bail on finding a house and return to the rental market.

"Even buyers able to afford a house at current rates could feel frozen, waiting for mortgage rates to fall dramatically again, like they did from the end of June to mid-July, when rates dropped 50 basis points in just two weeks," Zillow Chief Economist Skylar Olsen said in a statement. 

Mortgage rates have climbed mainly as the Federal Reserve has increased its benchmark rate in an attempt to combat inflation. Every percentage point increase in mortgage rates adds hundreds of dollars to monthly payments. 

Those additional costs of purchasing a home, have pushed out a lot of consumers, another economist said.  The housing market is now like "a middle school dance where a small number of buyers and sellers are pairing up during a slow song," Daryl Fairweather from Redfin said in a statement Friday.

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