January 6, 2023

Home prices look like they have further to fall

As home sales continue to decline, it makes sense that rising prices might decline, as well. But it seems prices have a lot further to fall.

Existing-home sales fell 7.7%% in November, according to the National Association of Realtors (NAR). Compared with November of 2021, home sales were down 35.4%%.

Despite decelerating gains, the median price for an existing home was $370,000. While down from the all-time records set during the summer of 2022, it was still 3.5% higher than November 2021.

Most analysts predict prices will fall nationally by about another 10%, bottoming out in the summer of 2023. They might go down even more in pandemic hot spots such as Phoenix; Boise, ID; and Austin, TX.

But it is important to put any price drops into perspective. Between May 2020 and June 2022, home list prices rose a stunning 40.6% - in a space of just over two years. So, a 10% drop isn’t as significant. The ongoing housing crunch is another factor. Unlike the Housing Crash of 2009, there are far more buyers than houses for sale.

And even if home prices fall across the country, it isn’t going to make up for today's mortgage interest rates.

In its ongoing war against stubborn inflation, the U.S. Federal Reserve has hiked baseline interest rates to a range of 4.25% to 4.5%. Though its most recent hike in December was just 0.50% after four consecutive increases of 0.75%, the central banks still seems committed to continuing down that path.

As is typical, mortgage rates have followed, more than doubling since the start of the year. Today’s homebuyers are paying 81% more each month than 12 months ago. First-time homebuyers are priced out of the market entirely, and current homeowners are reticent to give up cushy low mortgage rates to move into better homes.

One glimmer of hope for housing comes in the form of the government’s latest inflation report. The Bureau of Labor Statistics said annual inflation fell to 6.45% in December, down from 8.2% in September. Combined with slowing wage inflation, moderating prices are fueling optimism that the economy might just see a soft landing.

The challenge is raising rates just enough to cool off the economy, but not tipping the entire country into recession with major job losses.

However, one bright side to a recession is the possibility the Fed lowers rates to stimulate the economy again and allow thousands of potential homebuyers to get off the sidelines.

Even if prices continue to cool, real estate experts don’t anticipate a repeat of the Housing Crash that helped set off the Great Recession.

Lending rules have been strengthened, and only the most qualified borrowers get approved. Borrowers have also gained a great deal of equity in the past few years, so even if they lose jobs, they would be more likely to sell than default on their loan.

Despite the end of Covid-19 deferrals and economic uncertainty, foreclosures have fallen steadily since December 2021.