How much could home prices fall?
Home prices have yet to catch up with the hard realities of today’s housing market. Median list prices were 15.9% higher year over year in the week ending May 14, according to the most recent Realtor.com data.
The disconnect is likely because many buyers locked in their mortgage rates before they shot up so much. Buyers might not realize they no longer qualify for as much money as they did when rates were lower or how much higher their monthly payments will be. And sellers are still seeing record sale prices and are reluctant to accept anything less. The result is the market will take a little time to adjust.
However, price cuts on listed homes were up 12% compared with last year, according to April data from Realtor.com. Experts predict fewer bidding wars and less outrageous offers over asking prices, which could also keep prices in check.
“Even the hottest market eventually cools,” says Compass’ Carlisle. “That’s the law of nature.”
Most real estate experts predict prices will flatten, rather than drop nationally. There are still too many would-be buyers than there are homes for sale.
“The fundamentals driving house price growth in the U.S. remain intact,” says Odeta Kushi, deputy chief economist at real estate financial services company First American. “The demand for homes continues to exceed the supply of homes for sale, which is keeping house price growth high.”
Another influx of cheap homes going up for sale, which would bring down prices across the nation, isn’t likely either.
“What really drove down prices were all of the foreclosures and short sales,” says McBride of Calculated Risk. Today, “the vast majority of people don’t need to sell. Without short sales and foreclosures, you don’t have the downward pressure on prices.”
Which housing markets are most vulnerable to falling prices?
Not every housing market is likely to emerge from a correction unscathed. Vacation areas, the Rust Belt and other parts of the country with weaker economies, and the lower end of the market could be hurt most by the changes underfoot. Cities with extremely high prices and high crime could also be affected.
“Second-home markets get hit hardest, fastest in a shift to a cooler market,” says Carlisle. Even though these are typically wealthier buyers, many have been affected by the downturns in the financial and crypto markets. “Nobody has to buy a second home.”
Lower-priced homes and communities where prices are more affordable could also be deeply affected. While it sounds a bit counterintuitive, buyers in these price ranges typically need mortgages. And they’re likely to have a harder time amassing down payments and qualifying for large-enough loans with these higher mortgage rates.
“One wild card in all of this is investors,” says Zandi. “They have a lot of cash to deploy, so they could keep the market going more strongly.”
The work-from-anywhere phenomenon is likely to play a part in which real estate markets continue to see price spikes—and which falter. If professionals can continue working remotely, some will likely leave the nation’s most expensive cities. Crime could also be a deterrent.
“The areas where it is super expensive and people are moving out will naturally be vulnerable to some price corrections,” says Lawrence Yun, chief economist of the National Association of Realtors. He believes the San Francisco Bay Area and New York City could be vulnerable.
The Bay Area is already seeing the start of what could become a correction.
“The market is definitely shifting and becoming cooler, and that’s becoming clearer day by day,” says Carlisle. “There are fewer buyers at open houses, there are fewer offers on new listings, and sometimes no offers. Price reductions are just beginning to creep up.”
Smaller cities where there aren’t enough high-paying jobs for locals to support these sky-high prices could also be on shaky ground. Already, prices are falling in some of these areas, predominantly in the Rust Belt.
The hottest parts of the country, which saw the steepest run-ups in prices, could also be in for a big shift. If fewer buyers from other parts of the country are moving in and there aren’t enough local buyers, prices could moderate.
However, Yun doesn’t believe there is any reason for folks to panic.
“If there is a correction, it will be a brief duration,” says Yun. “We may see some price reductions for one year before popping up again.”
More homes are going up for sale
Amid all of the uncertainty, a bright spot for buyers is the number of homes for sale is beginning to rise. Instead of inventory continuing to fall, about 5% more homes were on the market in the week ending May 14 compared with a year ago, according to Realtor.com data. Active listings ticked up 0.2% in the prior week.
That might not sound like much, but it was the first time there has been an increase in housing inventory since the end of June 2019 before anyone had ever heard of COVID-19. Prices surged by so much in response to the lack of properties for sale.
“The housing market is at a turning point,” says Hale of Realtor.com. “We’re starting to see signs of a new direction, but the ball is still in sellers’ courts in most housing markets.”
Article Courtesy of REALTOR.com
By Clare Trapasso / May 24, 2022
