What is a housing market correction and is it happening now?

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The housing market has been stealing headlines since 2020: record appreciation in home values, record numbers of offers on homes, and record high demand with record low supply.

But now, the headlines tell a different story: rising interest rates, soaring inflation, and fears of a looming recession. Some have even suggested that a market correction is on the horizon.

But a market correction isn’t bad news. It may be necessary to level the playing field for first-time homebuyers and others who haven’t been able to buy a home in the midst of a hyper-competitive seller’s market.

What is a housing market correction?

In real estate, a market correction occurs when home prices drop 10% below their peak market value. The median price of sold homes reached a $428,700 peak in the first quarter of 2022. For the current market to enter a correction, the national median home price would have to fall to $385,830 or lower.

A corrective drop in home prices is often preceded by slowing sales and increased inventory on the market. In June 2022, existing-home sales fell 5.4%, signaling to some that a correction may be imminent.

Is a housing market correction different from a housing crash?

Those who remember the mid-2000s housing bubble will also remember when it burst, resulting in the housing market crash of 2007. Home prices dramatically dropped after the collapse of Bear Stearns, and as a result, many homeowners suddenly owed more on their mortgage than their house was worth. (The crash was also fueled by speculative investors and unsound lending practices, which extended loans to people who could not afford them.)

It’s understandable that rumblings of a dip in home values may stoke fears that a similar housing market crash is in store. However, a market correction differs from a crash in several important ways:

Market correction Market crash
Home prices drop by 10% from peak Home prices drop by 20% from peak
Gradual, usually over six months or more Sudden
Supply and demand level out Demand drops, while supply increases

Most crucially, a market correction can be a healthy reset for hot markets — inventory replenishes, prices stabilize, and supply and demand level out. This lies in stark contrast to a market crash, which can result in catastrophic imbalances in inventory, prices, and supply and demand.

Is a market correction bad?

No, a housing market correction isn’t bad. It’s necessary to restore balance and could bring down the prices of homes, making them affordable for more people.

The housing market has been brutal for buyers, and especially hard for first-time homebuyers who lack the capital necessary to compete with investors and people buying in cash.

To afford payments on a median-priced home in April 2021 ($340,700, with a 3.5% down payment and 3.06% interest rate), you would need a minimum household income of $79,600 according to the Harvard Joint Center for Housing Studies. By April 2022, the minimum income requirement for a median-priced home had jumped to $107,600, due to both rising home prices and mortgage rates. This meant that 4 million households that rent would have been able to purchase a median-priced home could no longer afford to do so.

A correction could bring housing prices within reach of some of those 4 million households and make the dream of homeownership a reality for many who have been disheartened by market conditions.

Will there be a housing market correction in 2022?

Many economists and analysts anticipate that there will be a real estate market correction in late 2022 or 2023, while others, like JP Morgan, forecast housing prices to continue to increase as much as 12.5% in 2022 with a low risk of a correction.

But as in all things real estate, predicting a housing market correction comes down to location, location, location.

The boom of the past several years has impacted markets differently. For example, the median home price in Austin has jumped 23.5%, while the median home price in Detroit has grown by just 3.5%. Markets experiencing an over-valuation are more likely to experience a correction than markets that have remained relatively stable.

Regardless of whether or not the market technically corrects itself, Orchard Listing Agent Bobbie Schwartz says:

 “Prepare for what's going to feel like a market crash. We've been in such an extreme seller's market for so long that even the slightest shift towards a more balanced market will feel like a crash.”

What does a housing market correction mean for me?

Schwartz, who is based in Dallas-Fort Worth and has 14 years of real estate experience, points to a reality that is often lost in news coverage: Even small changes, let alone housing corrections, can leave a lasting impression on families for decades to come. Not only is the home the physical and emotional focal point of the family, it is also one of the greatest drivers of wealth for many Americans.

For those who worry about the consequences of a possible market correction, it’s best to understand how it could impact their specific situation.

For buyers

A housing correction could restore balance and provide a needed opening for the more than 9 million homebuyers who have been priced out of the current market. Realtors like Schwartz have noticed that sellers are willing to give a few more concessions, whereas it was absolutely unheard of before.

She compares buying a home to planting an oak tree: “When's the best time to plant an oak tree? Well, it's 20 years ago. The second best time is now, because it's just going to appreciate in value.”

Ready to break into the market? Orchard can help.

For sellers

Sellers need to be realistic in the event of a housing market correction. Home prices are projected to continue their upward trend through 2023, but at a slower clip. The era of the seller’s market, where people were flooded with dozens of offers tens of thousands of dollars over asking price in a single day are likely behind us. But that doesn’t mean you can’t still get top dollar for your home. Schwartz offers a piece of advice:

“Work with an agent who's really good at helping you manage those expectations and lets you know what should be happening, when it's happening, and what all of the next steps are. That's probably the most beneficial thing someone can do.”

When you sell a home with Orchard, you’ll work with an experienced local real estate agent. We’ll can also help you unlock the equity in your current home with a Guaranteed Home Sale. Get started with a free estimate — our valuations are 30% more accurate than the rest.

For current homeowners

Current homeowners are well-positioned to withstand a market correction. Whether you planted your oak tree 20 years ago or two months ago, you can rest assured that the tree will continue to bear fruit. 

Fannie Mae forecasts home values will grow by 10.8% by the end of the year and 3.2% by the end of 2023. While this is a marked slowdown from the staggering 20% increase in Q1 of 2022, it’s still the kind of growth that will build home equity for years to come.

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