Will there be a drop in house prices, and if so, by how much?
U.S. Housing Market Shows Signs of Softening Amidst Continued Price Growth
In the current housing market, a combination of limited inventory, ongoing demand, and regional affordability variations has led to a persistently high price trend, despite increased mortgage rates and affordability concerns. However, recent data and forecasts indicate this upward price trend may be weakening and could potentially reverse in the near future.
One of the key factors supporting home price strength is the inventory shortage. Although inventory is recovering, it remains below pre-pandemic norms, limiting supply and supporting price levels. Despite a significant increase over the last year (approximately 17%-33% rise depending on the region), inventory still reflects an imbalance relative to demand.
Demand dynamics also play a significant role. While high mortgage rates have dampened buyer activity, moderate improvements in existing home sales and steady renter household growth sustain demand, particularly for single-family homes. Homebuilder incentives are also attracting buyers and keeping starts relatively stable despite economic headwinds.
Regional market differences are another factor to consider. More affordable markets in the Midwest and some New York metro areas continue to see above-average growth in home prices compared to national trends, indicating localized demand and supply imbalances.
Economic and policy factors also influence housing supply and demand dynamics. Labor supply constraints and immigration policies can affect overall affordability and supply. Lower immigration may reduce construction labor and multifamily demand, impacting overall affordability and supply.
Despite these factors supporting prices, signs point toward a softening or slight decline in home values going forward. Indices forecast typical home values to decline by about 2% by the end of 2025, with price growth slowing to its weakest pace since 2012. Rising inventory and new listings are outpacing sales, which should increase buyer negotiating power and reduce upward pressure on prices. Rental growth is also slowing, reflecting reduced pressure on housing demand as market balances improve.
In the future, this trend could shift notably if inventory continues to recover toward pre-pandemic levels, easing supply constraints; mortgage rates stabilize or decline, improving affordability and increasing buyer activity; economic conditions and housing policies either alleviate or exacerbate labor and material shortages; and regional demand patterns evolve due to migration trends or local economic growth.
In the face of a slowing market, Coldwell Banker Affiliates recommends investing in cosmetic improvements to help your home show better, hiring a listing agent who understands assertive tactics for a slow market, and getting a home appraisal before listing to stave off a lowball appraisal by the buyer.
For would-be homebuyers, the downturn in some markets represents a "second chance" at buying. However, affordability remains a major constraint due to high mortgage rates and the need for a high income to qualify for a mortgage. Some formerly hot markets in the Sun Belt, such as Texas and Florida, have seen property values sliding. To navigate a slow market, Jason Waugh, president of Coldwell Banker Affiliates, suggests making "reverse offers" to potential buyers as a tactic.
Sources:
- Realtor.com
- National Association of Realtors
- Zillow
- Bright MLS
- In the face of a potential decline in home values, home equity could be affected, making it crucial for homeowners to consider financial strategies and planning to manage their wealth.
- As mortgage rates continue to influence buyer activity, investors may find opportunities by closely monitoring regional housing-market trends and considering real-estate investments that offer competitive mortgage rates and long-term growth potential.
- Despite a slowing housing-market trend and rising inventory levels, some regions still see above-average home price growth due to local demand and supply imbalances, making it essential for would-be buyers to conduct thorough market research before making an investment in the real-estate sector.
