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Home prices have risen 19.8% in the past year, pricing out more than 9 million American homebuyers.
The red-hot market is showing signs of cooling, but potential homebuyers who can’t afford a home are still waiting for their way in. Home sellers eager to take advantage of the market are growing anxious that they may have missed a golden opportunity. Both are left wondering: When will house prices go down?
There are signs that the double-digit growth of the past year is starting to slow. Home prices are already starting to come down in some markets, but home values are unlikely to drop significantly in the long term.
Are home prices going down?
The answer depends on the market. More than 40% of home sellers in the most competitive markets are cutting their prices according to recent studies. These numbers have driven the share of homes with price drops to a record high, especially in Western metro areas that had exponential growth in the last two years.
Signs that house prices will go down
People waiting for home prices to level out in their market should look for the following signals, which can signal that asking prices may go down:
- Interest rate hikes: When interest rates go up, so does the cost of mortgages, which eventually dampens demand. Less demand means less competition for houses, motivating sellers to cut costs. This is one factor that is driving down prices in some markets today. (Learn more about what affects mortgage rates.)
- Median days on market (DOM) going up: The longer homes stay on the market, the more supply there is for homebuyers, which can lead to lower prices. Keep tabs on the market trends for your area to see how DOM may affect listing prices near you.
- Recession reduces demand: Although home values generally continue to appreciate during recessions (with the notable exception of the 2007 financial crisis), a declining economy puts pressure on financial resources, which could reduce demand in the same way interest rate hikes do. This could also cause sellers to lower home prices.
Will home prices drop dramatically?
When sellers cut asking prices, that isn’t the same as home values dropping. Nationally, housing prices are expected to continue their upward trend, but at a slower rate than the last two years.
Fannie Mae projects housing prices to grow by 10.8% through 2022 and 3.2% by the end of 2023. The projected growth in home prices for 2022 and 2023 is smaller than the 19.8% growth experienced in early 2022 — but housing prices are still rising.
Some experts expect the markets that have seen the highest increases in home values, like Boise and Las Vegas, to see a dip in home values. Prices in these super-hot markets have been driven up by record demand and bidding wars. Researchers at Florida Atlantic University and Florida International University calculated that homebuyers in these markets are paying, respectively, a 69% and 63% premium (above its historical implied price) to buy in these areas.
A cooling market promises to restore some normalcy to markets like these. However, it is unlikely that home value appreciation will reverse nationally.
Where home prices could go down
While it’s unlikely that home prices will drop across the board, the following markets may be more vulnerable to negative appreciation because they have been overvalued and overpriced. The following chart shows the top 15 cities where buyers have been paying the biggest premiums (in other words, where the homes are the most overpriced) that could see a drop as the market cools down.
What happens when home prices don’t drop
In the past two years, many homeowners and sellers have grown accustomed to double-digit appreciation in home prices. The sky-high trajectory of home values has meant record equity gains for homeowners — topping $27.8 trillion nationally in June 2022. However, it has also prevented many first-time homebuyers from entering the market.
As home values have risen, the affordability of houses has continued a steep downward trend. The Housing Affordability Index, which measures the ease with which a family with a median income can qualify for a mortgage on a median-priced home, shows just how much housing affordability has suffered.
A market correction brings the promise of equilibrium. After the unprecedented volatility of the last two years, any sense of normalcy in the market may feel like a price drop — especially for those who have been waiting to buy a home for the first time.
Will house prices go down in 2023?
The effects of the Federal Reserve raising interest rates are likely to be felt in 2023. These rate hikes impact mortgages (rates are up to nearly 6% for 30-year fixed-rate loans) and make it harder for home builders to fund new construction.
The push and pull of high borrowing costs against low inventory will likely cause home price volatility in 2023. On the one hand, it’s more expensive to buy homes because of the costs of securing a mortgage (which should dampen demand). On the other, though, is a decades-long inventory shortage with no end in sight (increasing demand).
Moody’s forecasts the housing market to begin leveling out by the end of 2023. Here are some of the factors influencing that return to normalcy:
- Inventory levels will remain tight, driving demand despite higher mortgage interest rates.
- Mortgages continue to have solid underwriting, decreasing the chances of widespread default like in 2007.
- Overvalued markets are expected to normalize in value.
- A greater share of millennials entering the market will keep demand healthy.
How will house prices going down affect me?
The changing market will impact buyers, sellers, and homeowners differently. Here’s how the market may impact you:
Homeowners who have enjoyed double-digit rates of appreciation may be worried about their home equity as the market goes through this period of transition. However, it’s important to remember that appreciation is only one factor that drives home equity — so does paying down your mortgage and investing in high ROI projects for your home.
While higher interest rates may have prevented people from buying their first home right now, prospective homebuyers can expect more flexibility in asking prices, especially if they’re in a hot market.
According to Deitrich Fields, an Orchard Buying Advisor based in Dallas-Fort Worth, we’re moving towards a fair market, compared to the past two years.
A year ago, homes didn't last on the market past that weekend, but now we're starting to see homes stay on the market two, three weeks, four weeks. All of this is a step in the right direction.”
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For homeowners who are feeling trapped by the fluctuations in the market, and its effect on home prices, Fields offers some comforting advice:
“If you own property, there's no such thing as being powerless. I still have not seen a seller who's experienced significant losses in this market. Sellers will still be able to unlock their equity and come out on top.”
In an environment where house prices may start dropping, people looking to sell in this market should:
- Have realistic expectations: The market has changed and will continue to in the months ahead. There is plenty of reason to remain optimistic, and selling a home in a weekend for tens of thousands of dollars over the asking price may become unlikely.
- Set a competitive asking price: As sellers readjust their asks in a cooling market, be prepared to set a listing price that reflects the changing landscape. Work with your agent to discuss strategies and help you set a price that will sell.
- Be prepared to wait: The median days on market is on the rise and is expected to continue as the market normalizes. Don’t be concerned if your house is on the market for longer than a month — this is a sign of the market returning to a healthy balance. Still worried? Consider this: The lowest median days on market in 2019 was 56 days, and 2019 was considered a seller's market.
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