When will home prices go down in the US? This is what the experts say
Rising mortgage rates and overvalued homes are pushing potential buyers out of the market. The lower demand in some cities is causing prices to drop.
Housing prices have been on a tear since the COVID-19 pandemic caused the great American migration. The underlying reasons for the dramatic rise in the cost of buying a house nationwide are many. However, the raising of rates by the Federal Reserve to tackle high inflation has sent mortgage rates climbing as well. With these factors coupled, home prices hit a historic peak in late 2022 of $479,500. Interest rate increases have priced some buyers out of the market, leading to decreased demand, which has allowed prices to fall slightly in 2023 to $416,000. For reference, in early 2020, the median selling price was $329,000.
The 30-year fixed rate home loan stands around 7.57 percent, the highest rate seen in decades. Prices have started to come down slightly thanks to these higher rates, but this is both good news and bad news, depending on your vantage point.
Home prices have risen steadily since 2020
Compared to the first half of 2020 to prices seen during the same period in 2023, the average price for a sold home in the US has increased by 32 percent. However, compared to the latter half of 2022, the average has fallen from $550,200 to $500,200.
The Federal Reserve has released the October Beige Book, which provides updates from each of the Federal Reserve divisions on topics related to the housing and labor markets, as well as consumer spending, tourism, and more.
The Atlanta Fed reported that demand in the housing market within their jurisdiction, and according to the Fed division’s Home Ownership Affordability Monitor, this summer, the index fell to the lowest level on record, reflecting an extremely unaffordable market. The HOAM compares the average price of houses on the market with incomes. “A HOAM index value lower than 100 indicates that the median household income is insufficient to cover the annual costs of owning a median-priced home,” reports the Atlanta Fed. In July 2023, the more recent data calculated the HOAM to be 68.4. More concerning is that affordability has been decreasing since May 2021, which happens to be the last time the HOAM stood above 100. A number over 100 indicates that “the median household income is sufficient to cover the annual costs of owning a median-priced home.”
This means that although home prices are decreasing, the majority of households in the US cannot afford to purchase a home.
The Fed warns that supply remains tight, which could push up prices
The New York Fed reported that supply remains extremely tight, and unless more houses are put on the market, prices are unlikely to fall dramatically.
Persistently low inventory has remained a limiting factor in housing markets across the District and continued to restrain sales activity. Despite rising mortgage rates, home prices have continued to edge up with still-solid demand and low supply
The Philidelphia Fed reported a slight increase in “existing-home sales [...] but remained well below the level of sales observed in prior years.” Like the conditions in New York, low inventory and higher mortgage rates drove sales down, and these conditions had a disproportionally negative impact on first-time homebuyers. There are no areas that reported major decreases in prices. Additionally, if supply does not increase and the Fed chooses to bring down interest rates, demand could rise quickly, leading prices to rise again.
There are some signs that supply may begin to increase slightly, with the US Department for Housing and Urban Development reporting that in August, 73,000 homes were constructed and put up for sale. This is the highest number since April 2020.