Will home prices fall?

The top question on the minds of homebuyers and sellers alike is whether home prices are going to fall—and if so, by how much.

Many real estate experts anticipate the rate of price growth will slow down as the year goes on. Others predict prices will flatten out as sellers and builders digest the new state of the market and buyers figure out their finances.

“It takes a little time for the wheel to turn,” notes Devyn Bachman, senior vice president of research at John Burns Real Estate Consulting.

Ultimately, exactly what happens to prices will depend largely on individual real estate markets as well as the price ranges the homes are in. Places where prices rose the most during the COVID-19 pandemic are the most likely to come down and have the potential to decrease the most.

But prices could continue to rise, at least by low single digits, in other parts of the country.

“Housing is so local that it’s hard to paint with a broad brush and say prices will decline. But if you look at the individual ZIP codes as well as certain metros, we will see pricing declines in some of them,” says Bachman. “Home values are no longer realistic for today’s buyers. They can’t afford them.”

A recession is the wild card in the future of home prices

The wild card in all of this is a recession. If there’s an economic downturn, then home prices (as well as mortgage rates) are more likely to adjust. Potential buyers who are laid off or are worried about losing their jobs, probably aren’t going to be attending open houses and putting in offers.

However, home prices aren’t expected to drop off a cliff the way they did during the Great Recession.

The reason: The number of investors and aspiring homeowners right now far exceeds the number of properties for sale. Builders have struggled to ramp construction back up since the mid-2000s, and investors have bought many of the properties that used to house homeowners and turned them into rentals. That demand is expected to keep prices high.

“The market is very tight. That will put a proverbial floor under prices,” says Zandi.

Meanwhile, an influx of foreclosures and short sales like what the housing market experienced in the Great Recession doesn’t appear on the horizon. Lenders have become much choosier when doling out mortgages to ensure only the most qualified applicants receive them. Most predatory mortgages have been eliminated. This leaves homeowners in a much better place to weather another downturn.

“To get big declines in prices, you need to see a lot of foreclosure and distressed sales at big discounted prices,” says Mark Zandi, chief economist at Moody’s Analytics. “That’s very unlikely because mortgage lenders have been very cautious since the crisis, and they’ve only [mainly] been making plain vanilla 30-year and 15-year fixed-rate loans.”

He anticipates a downturn could push prices down 5% across the board and much more so in overheated markets.

And, in a boon for buyers, mortgage rates typically fall when the economy is hurting. That can “cushion the blow” for many folks struggling to afford real estate, says Zandi.

The housing correction is fewer sales, more available homes

While the housing correction might not yet be showing up in prices, it’s apparent in the fast-falling number of homes changing hands.

There were about 6.1 million home sales a month in 2021, according to the National Association of Realtors® data. (This doesn’t include sales of newly constructed homes.) In May, the latest month of data available, that fell to about 5.4 million sales a month. That’s a substantial change.

“Home sales have slowed pretty notably. They’re back below their pre-pandemic pace,” says Hale, of Realtor.com. “The housing market is not as hot as it was last year. But compared to any pre-pandemic year, it’s still a pretty hot real estate market.”

One of the side effects of fewer sales is an increase in the inventory of homes on the market, helping to ease the housing shortage. There were 18.7% more homes for sale in June than there were a year ago.