Are Home Prices Going to Come Down?

In today’s real estate landscape, headlines often paint a confusing picture of what’s happening with home prices. Some articles suggest an imminent crash, while others forecast continued growth. So, what’s the reality? Let’s dive into the facts and clarify what’s truly going on with home prices today.

What Does a Price Correction Really Mean?

The term "correction" is frequently used when discussing potential changes in home prices. But what exactly does that mean? Danielle Hale, Chief Economist at Realtor.com, explains it this way:

“In stock market terms, a correction is generally referred to as a 10 to 20% drop in prices. . . We don't have the same established definitions in the housing market.”

In the context of real estate, a correction doesn’t necessarily indicate a dramatic fall in home prices. Instead, it reflects a slowing pace of growth, where prices stabilize after a period of rapid increase. Essentially, home prices are not plummeting; they're simply finding a more sustainable growth rate. While individual markets may experience different trends, a drastic nationwide decline is unlikely.

The Real Estate Market Is Returning to Normalcy

Between 2020 and 2022, home prices surged at an unprecedented rate. Factors like low-interest rates, a significant shortage of available homes, and heightened buyer demand fueled this growth. However, such aggressive price increases couldn’t persist indefinitely.

Now, we’re witnessing a slowdown in price appreciation—a key indicator that the market is gradually normalizing. According to recent data from Case-Shiller, while prices are still climbing, the pace is noticeably more measured compared to the dizzying heights of the past few years (See graph below):

• Current Trends: The latest figures show that home prices have begun to rise nationally after a period of relative stagnation last year. However, this increase is much more balanced and sustainable.

• Key Takeaway: The market has shifted from the extraordinary growth seen during the pandemic to a healthier and more manageable rate of price increases.

What Lies Ahead for Home Prices?

Looking ahead, experts agree that home prices will likely continue to appreciate, but at a more moderate pace. Marco Santarelli, Founder of Norada Real Estate Investments, puts it succinctly:

“Expert forecasts lean towards a moderation in home price growth over the next five years. This translates to a slower and more sustainable pace of appreciation compared to the breakneck speed witnessed in recent years, rather than a freefall in prices.”

The real estate market remains influenced by the fundamental forces of supply and demand. An increase in housing inventory coupled with decreased buyer demand—partially due to higher mortgage rates—will likely temper the upward pressure on home prices.

Implications for Buyers and Sellers

For potential homebuyers, the deceleration in price growth is undoubtedly welcome news. The rapid price hikes during the pandemic rendered homeownership out of reach for many aspiring buyers. Now, the landscape appears a bit more promising.

• Affordability: Slower price gains make homes more affordable, and the prospect of continued appreciation provides a sense of security that your investment will still grow over time.

Odeta Kushi, Deputy Chief Economist at First American, notes:

“While housing affordability is low for potential first-time home buyers, slowing price appreciation and lower mortgage rates could help—so the dream of homeownership isn't boarded up just yet.”

On the flip side, sellers may need to adjust their expectations. While prices are not expected to drop significantly, the days of explosive gains might be over for now. Pricing homes appropriately for the market will be crucial to attracting buyers in this evolving landscape.

Bottom Line

At a national level, home prices are not expected to decline sharply. Most experts agree that while growth will continue, it will do so at a more moderate pace. However, keep in mind that real estate is inherently local, and market conditions can vary greatly depending on the area. This is where a knowledgeable real estate agent becomes invaluable. If you’re curious about what’s happening with home prices in your specific market, reach out to a trusted real estate professional for guidance and insights tailored to your area.