Housing market: Cities where home prices are expected to drop in 2023

After home prices began coming down in 2022, they are again ticking up, even as the interest rates for 15-and-30-year mortgages hit their highest levels over a decade.

The Federal Reserve’s decision to rapidly increase the Federal Funds Rate (FFR) to slow inflation led to a steep increase in the mortgage markets, but so far, this has not had the desired effect on housing prices. The Bureau of Labor Statistics (BLS) has reported that housing continues to drive average prices up, even as other sectors have seen inflationary pressure dissipate.

The impact of higher interest rates on housing prices

As interest rates rise, some potential buyers may find themselves priced out of the housing market due to the increased cost of homes and mortgages, causing demand to decrease. This decrease in demand should, in theory, lead to a drop in prices due to the basic principles of supply and demand. However, the Federal Reserve has noted that many housing markets are experiencing a shortage of available homes. If prices do fall too much, demand could once again increase and push prices back up. In markets with more available homes, changes in demand will have a greater impact on price as buyers will have more options to choose from.

Housing markets where prices are falling

The Federal Housing Finance Agency (FHFA) publishes quarterly data that tracks changes in the prices of homes in the country’s 100 largest metropolitan areas. Of all areas, only a fifth have seen prices fall over the last year. The challenge for first-time homebuyers will be that many of the cities that have seen prices decrease are very expensive housing markets, to begin with.

For example, there was a 10% decrease in prices in the San Francisco-San Mateo-Redwood City region during the first quarter of 2023 compared to the same period in 2022. As the graph below shows, prices may be falling in this area, but they remain well above their pre-pandemic levels.

In April, Zillow projected that home prices in San Fransisco would fall 0.2 percent by the end of July. However, looking ahead to next year, prices are expected to begin rising once again, meaning that any relief felt by buyers this summer may not be available in the longer term.

Another market that has seen prices fall is that covering Austin-Round Rock-Georgetown, where the average selling price fell nine percent. Like San Fransisco, Zillow projects prices to fall by 1.3 percent by August, but by next spring, analysts expect that prices will have risen 2.2 percent.

The Sacramento-Roseville-Folsom area has seen prices fall by 7.19 percent over the last year, placing the California capital and surrounding area in third place. Zillow projects that prices will continue to fall by 0.5 percent in the short term, but like the previous two areas, prices are expected to rise later this year or early next.

Traveling down I-80, we hit the fourth area on our list, Oakland-Berkeley-Livermore, where prices have fallen by 7.17 percent. In another expensive housing market, prices are still much higher than they were in 2019.

Moving north, the fifth and final market we will take a look at is Seattle-Bellevue-Kent in Washington, where prices have also decreased by over seven percent. And, while prices are down compared to where they were in Q1 2022, they did increase slightly towards the end of the year.

Unlike the other areas, Zillow projects prices to continue increasing in the coming months but suggests that they are unlikely to hit the levels seen in mid-2022.