Home prices have risen 19.8% in 2022, pricing out more than 9 million American homebuyers. House prices "though certainly slowing and in some places declining, remain elevated compared to pre-pandemic levels," says Doug Duncan, Chief Economist at Fannie Mae in his December 2022 forecast.
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 house prices will come down, if ever.
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.
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.
When sellers cut asking prices, that isn’t the same as home values dropping. The median sale price of homes increased throughout 2022, though it slowed in the third quarter.
As far as the future goes, nationally, housing prices are expected to decrease by only down 0.2% by the end of 2023, according to Freddie Mac.Bright House MLS predicts 10% price drops in some areas, while the Federal Reserve Bank of Dallas projects prices might come down as much as 15% to 20%.
A cooling market promises to restore some normalcy to certain markets. However, it is unlikely that home value appreciation will reverse across the country as a whole.
→ Learn more about whether now is a good time to buy a house
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:
→ Find out whether it's a buyers or sellers market
The effects of inflation and rising 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 continue to 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:
Related: Should I buy a house during a recession? Are we in one now?
Some experts expect home values go down in markets that have seen the highest increases, like Boise and Las Vega. Prices in these super-hot markets have been driven up by record demand and bidding wars.
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.
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.
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.
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.
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.”
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:
Want to know how much your home is worth? Get started with a free valuation — our estimates are 30% more accurate than leading estimates.
Orchard guarantees your home will sell, so you can buy your next one worry-free.
We provide peace of mind that your home will sell, plus list your home on the market to maximize your earnings.
Use our home sale calculator to estimate your net proceeds.
Our Home Advisors are experienced local agents who know how to sell for top dollar and help win your dream home.
All Orchard Home Advisors are experienced agents who know your local market inside and out. Request a consult today.
Did you know cash offers are 4x more likely to be chosen by a seller? Let us help you make one on your next home.
Orchard’s home value estimates are 30% more accurate.
Orchard Home Loans shops the market to find your best rates.
A cash offer is 4x more likely to be chosen by a seller. Get qualified today.
Make a cash offer now, and Orchard will sell your old home after you move.
Tell us your must-haves to see personalized home recommendations that meet your criteria.
With Orchard, secure your dream home before you list. Avoid home showings, rentals, and double moves.Learn More