The US housing market is in the midst of a major shift. After two years of stratospheric price appreciation, home prices have peaked and are on the way down.
But what homebuyers and homeowners want to know is how much will prices drop?
Short answer: Prices are likely to fall further, but not as much as during the housing crisis. From their peak in 2006 to 2012, national home prices fell 27%, according to the S&P CoreLogic Case-Shiller Indices, which measure US home prices.
“It was different in 2008 and 2009 because that price drop was driven by sellers,” said Jeff Tucker, senior economist at Zillow. “Because of the contracts and short sales, there were a lot of highly motivated sellers willing to take a loss on their homes.”
Additionally, this housing crash occurred at a time when the inventory of homes for sale was four times larger than it is now. Current inventory is still significantly lower than pre-pandemic levels, which has increased competition for homes. And that keeps prices pretty strong.
“I would be surprised to see prices drop below where they were in 2019,” Tucker said. “There was an overheat in the housing market in 2021 this spring that pushed prices higher than the fundamentals would support. Now they’re coming down.”
With mortgage rates more than doubling since the start of the year, a home buyer’s calculations have changed considerably. The monthly mortgage payment for principal and interest on the average priced home has increased by $930 from a year ago, a 73% increase, according to mortgage data company Black Knight.
When you throw in rising mortgage rates, along with elevated home prices and wages that aren’t rising as fast, buying a home is cheaper now than it has been in decades, according to Black Knight.
But there may be some relief for buyers.
Economists at Goldman Sachs expect home prices to fall about 5% to 10% from their peak in June.
Wells Fargo recently predicted that the national median single-family home price will decline 5.5% year-over-year by the end of 2023.
Economists at Wells Fargo forecast the median price of an existing single-family home to reach $385,000 this year, up 7.8% from last year, but growth will be much slower than the 19% year-over-year increase seen in 2021.
Economists predict the median home price will drop to $364,000, a 5.5% drop this year. They predict prices will rebound and rise again in 2024, with the average price rising 3.3% to 376,000 by the end of 2024.
“The primary driver behind the housing market correction thus far has been significantly higher mortgage rates,” Wells Fargo researchers wrote. “If the Fed’s rate cut forecast plays out, mortgage rates are likely to fall slightly as inflationary pressures drive real income growth. This should be followed by a modest improvement in sales activity, which should revive home price appreciation through 2024. “.
Ultimately, how much prices have dropped will depend on where you live.
Unlike price increases during the pandemic, which saw home values rise in markets across the country, the cooling will be more regional, Tucker said. The declines will be felt more deeply in places that saw bigger gains during the pandemic, many of them in the West and in the Sunbelt, including cities like Austin, Phoenix and Boise, he said.
“Nationally, we can see a 5% decline from the peak,” Tucker said. “But prices will fall more in the West and the decline will be smaller in the Southeast.”
In September, home prices fell month-over-month 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 rose nearly 60% during the pandemic, is already seeing annual declines, with prices down 3.9% year over year in September, according to Zillow.
“Some metro areas, especially in the West, will see some year-over-year price declines this spring,” Tucker said. “That will be the worst period for comparison, because many markets peaked then.”