The US real estate market is changing. After two years of stratospheric price appreciation, house prices have peaked and are on their way back down.
But what buyers and owners want to know is: how much will prices drop?
The short answer: prices should fall further, but not as much as they did during the housing crisis. From the 2006 peak to the 2012 trough, national home prices fell 27%, according to the S&P CoreLogic Case-Shiller indexes, which measure U.S. home prices.
“It was different in 2008, 2009 because that price drop was due to a push from sellers,” said Jeff Tucker, senior economist at Zillow. “Because of foreclosures and short sales, there were a lot of extremely motivated sellers who were willing to take a loss on their homes.”
Moreover, this housing crash came at a time when the stock of homes for sale was four times higher than it is now. Current inventory is still significantly below pre-pandemic levels, which has increased competition for homes. And that keeps the prices relatively high.
“I would be surprised to see prices drop anywhere below where they were in 2019,” Tucker said. “There was some overheating in the housing market in 2021 through the spring that pushed prices higher than fundamentals would support. Now they are going down.
With mortgage rates having more than doubled since the start of this year, the calculations for a homebuyer have changed significantly. According to Black Knight, a mortgage data company, the monthly mortgage principal and interest payment on the median priced home is up $930 from a year ago, an increase of 73%.
When you factor in skyrocketing mortgage rates, along with high house prices and wages that aren’t rising as fast, buying a home is less affordable today than it once was. for decades, according to Black Knight.
But there may be some relief in sight for buyers.
Economists at Goldman Sachs expect home prices to decline about 5-10% from the peak in June.
Wells Fargo recently forecast national median single-family home prices to fall 5.5% year-over-year by the end of 2023.
Wells Fargo economists estimate that the median price of an existing single-family home is $385,000 this year, up 7.8% from last year, but the growth will be well below the increase in 19% year-over-year observed in 2021.
Economists forecast the median home price to fall to $364,000, down 5.5% from this year. They forecast prices to rebound and rise again in 2024, with the median price rising 3.3% to 376,000 by the end of 2024.
“So far, the main driver of the housing market correction has been the sharp rise in mortgage rates,” the Wells Fargo researchers wrote. “If our Fed rate cut forecast materializes, mortgage rates should come down slightly, as cooling inflationary pressures boost real income growth. A modest improvement in selling activity should then follow, which will kick-start home price appreciation by 2024.”
Ultimately, the price drop will depend on where you live.
Unlike the price spike during the pandemic that drove up home values in markets across the country, the cooling will be more regional, Tucker said. The declines will be felt most deeply in places where there have been bigger gains during the pandemic, including many in the West and the Sunbelt, including cities like Austin, Phoenix and Boise, he said.
“Nationally, we could see a 5% decline from the peak,” Tucker said. “But prices will fall more in the West and there will be a smaller fall in the Southeast.”
In September, month-over-month home prices fell in several pandemic hotspots, including Phoenix, down 2.3%; Las Vegas, down 1.9% and Austin, down nearly 1%, according to Zillow.
And Boise, Idaho, where prices jumped nearly 60% during the pandemic, is already seeing year-over-year declines, with prices falling 3.9% year-over-year in September, according to Zillow.
“A number of metro areas, particularly in the West, will experience year-over-year price declines this spring,” Tucker said. “It will be the worst time for comparison because that’s when many markets peaked.”