The US housing market is in the midst of a major shift. After two years of price increases in the stratosphere, house prices have peaked and are falling again.
But what homebuyers and homeowners alike want to know is: How much lower will prices go?
The short answer: prices are likely to fall further, but not as much as during the housing crisis. According to S&P CoreLogic Case-Shiller Indices, which measure U.S. home prices, national home prices have fallen 27% from the 2006 peak to the 2012 trough.
“It was different in 2008, 2009 because that price drop was the result of a push from sellers,” said Jeff Tucker, senior economist at Zillow. “Because of foreclosures and short sales, there were many extremely motivated sellers who were willing to take a loss on their home.”
Moreover, the housing crash came at a time when the stock of houses for sale was four times as high as it is now. Current stock is still significantly below pre-pandemic levels, increasing competition for homes. And that keeps prices relatively strong.
“I’d be surprised if prices drop anywhere below 2019 levels,” Tucker said. “There was some overheating in the housing market in 2021 through this spring, pushing prices above what fundamentals would support. Now they’re coming down.”
With the mortgage interest rate more than doubling since the beginning of this year, the calculations for a home buyer have changed considerably. The monthly repayment of principal and interest on the average-priced home is $930 higher than a year ago, up 73%, according to Black Knight, a mortgage data company.
If you factor in rising mortgage rates, along with increased house prices and wages that aren’t rising as quickly, buying a home is less affordable now than it has been in decades, according to Black Knight.
But there may be some relief in sight for buyers.
Economists at Goldman Sachs expect house prices to fall about 5% to 10% from their peak in June.
Wells Fargo recently forecast that national average prices for single-family homes will fall 5.5% year-on-year by the end of 2023.
Wells Fargo economists estimate that the median price for an existing single-family home will be $385,000 this year, up 7.8% from last year, but the growth will be much less than the 19% year-on-year increase in 2021.
Economists expect the median home price to fall to $364,000, down 5.5% from this year. They predict that prices will recover and rise again in 2024, with the median price rising 3.3% to 376,000 by the end of 2024.
“The main driver behind the housing correction so far has been sharply higher mortgage rates,” the Wells Fargo researchers wrote. “If our forecast for rate cuts by the Fed comes true, mortgage rates are likely to fall slightly, just as cooling inflationary pressures are fueling real income growth. After that, a modest improvement in sales activity should follow, which should fuel the rise in house prices again by 2024.”
How much prices eventually drop depends on where you live.
Unlike the price hikes during the pandemic that sent home prices soaring in markets across the country, the cooling will be more regional, Tucker said. The declines will be felt more deeply in places where there were bigger gains during the pandemic, many of them in the West and Sunbelt, including cities like Austin, Phoenix and Boise, he said.
“Nationally, we could see a 5% drop from the peak,” Tucker said. “But in the West, prices will fall more and in the Southeast there will be a smaller drop.”
In September, monthly house prices in several pandemic hotspots, including Phoenix, fell by 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, according to Zillow, with prices dropping 3.9% year over year in September.
“A number of metropolitan cities, especially in the West, will see year-over-year price declines this spring,” Tucker said. “That will be the worst time to compare because that’s when a lot of markets peaked.”