Will home prices drop in 2023 and 2024?
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- Even as demand has slowed, extremely low supply has kept home prices from falling.
- Prices have increased significantly in 2023, and they'll probably go up in 2024, as well.
The unprecedented, dizzying home price growth we saw throughout the pandemic left many would-be buyers priced out of the market, wondering if they'll ever get priced back in.
Though there are plenty of would-be homebuyers eager to take advantage of a full housing market bubble burst, even incrementally lower home prices are unlikely to materialize in 2023 or 2024.
Are home prices dropping?
Though they did fall a bit late last year, home prices aren't currently dropping. In fact, they're increasing.
As of September, home prices in the US have risen 6.08% so far in 2023, according to the S&P CoreLogic Case-Shiller Home Price Index. Prices had briefly been trending down after peaking in June 2022. But they bottomed out in January of this year and have been climbing back up ever since.
Will home prices drop in 2023?
Despite some predictions that they would, home prices did not end up dropping in 2023. In fact, they rose quite a bit. Right now, prices are up significantly from their January low and they're also up 3.93% from where they were this time last year.
Though high mortgage rates have slowed homebuying demand and moderated the pace of price appreciation, home values have remained surprisingly resilient. This is in spite of the fact that existing-home sales are down more than 14% year over year, according to October's report from the National Association of Realtors.
"Speeding up of annual home price growth reflects much of the pent-up demand that exists in the housing market amid very low inventories," Selma Hepp, chief economist at CoreLogic, said in an email.
Price growth likely will decelerate as we head into the winter months, when fewer buyers are looking for homes. But because inventory is so tight, we still probably won't see any price drops in the coming months.
Will home prices drop in 2024?
Most major forecasts don't expect home prices to drop in 2024. Here's where some of the major industry players currently think home prices will end up by the end of next year:
|Expected home price change in 2024
|National Association of Realtors
|Mortgage Bankers Association
Looking even further ahead, the Mortgage Bankers Association believes that prices will increase another 3.3% in 2025, while Fannie Mae believes we could see prices inch down 0.4% that year. NAR doesn't forecast out that far.
Of course, it's hard to say with certainty what will happen in the coming months and years. In January 2023, most experts were expecting prices to fall a bit to compensate for the unusually high increases we saw in the previous two years. But based on what we know right now, it's unlikely that home prices will drop soon, especially considering that mortgage rates are expected to go down in 2024, which will likely boost homebuying demand and push up prices.
Why are home prices so high?
Real estate is an appreciating asset, which means that home values typically increase over time. Though they do drop occasionally, like they did during the Great Recession, prices have historically trended up.
Home prices, like a lot of things, are driven by supply and demand. During the pandemic, demand for homes shot up as mortgage rates fell and people had more money to spend. As a result, price appreciation started accelerating.
Low supply only made affordability worse. Short-term trends may have played some part in this, since many sellers delayed listing their homes during the pandemic, either due to COVID concerns or out of a reluctance to enter a frenzied market as a buyer.
Together, these forces caused home prices to climb up at an astonishing rate. Now that they're so high, many are wondering if they'll ever come back down. But because supply is chronically tight, any drops we might see would likely be relatively moderate.
The US has a big housing supply problem
Doug Duncan, the senior vice president and chief economist at Fannie Mae, says most analysts believe the lack of supply has driven the dramatic price increases we've experienced over the past few years.
"Starting back in 2015, house prices since then have been appreciating at significantly faster than the long term average," Duncan says.
In its 2021 research note "Housing Supply: A Growing Deficit," Freddie Mac estimated that the US was 3.8 million units short of a healthy housing supply. The problem is especially pronounced when it comes to entry-level homes.
There are two main ways to add to the housing supply: listing existing homes for sale, and building new ones. Part of the problem is that the baby boomer generation is holding onto a lot of real estate, and they aren't leaving their homes to live in retirement communities or assisted living facilities at the same rate previous generations have.
"Right now, the boomers are doing what they said they were going to do, which is aging in place," Duncan says.
That's not to say it's a bad thing that older adults are able to remain independent for longer, often thanks to advances in technology and telehealth, but it cuts off a key source of inventory that isn't added elsewhere. When younger adults sell their homes, for example, they're typically also looking to buy another, increasing turnover, not supply.
The bigger problem is that new homes aren't being constructed at a fast enough pace to meet demand. According to the Freddie Mac research note, "...the main driver of the housing shortfall has been the long-term decline in the construction of single-family homes."
Duncan says that the Great Recession destroyed around 75% of the housing supply chain. During this time, nobody was building houses, so a lot of workers exited the industry, and many businesses shut down.
The supply chain is still recovering from this, and after decades of underbuilding entry level homes, builders are having a hard time meeting demand for affordable inventory.
How mortgage rates affect home prices
As mortgage rates increased over the past two years, home buyers struggling with affordability have been priced out of the market. Fewer buyers naturally means less demand, which can impact the rate at which home prices appreciate.
Home prices started inching down on a monthly basis last year right as mortgage rates were spiking, and they continued to fall as 30-year mortgage rates surpassed 7% for the first time in two decades, according to Freddie Mac.
But rates spiked even higher in 2023, nearing 8% in October. In spite of this, home prices have been consistently rising since January.
This may be due to already-tight inventory getting even tighter. As mortgage rates continued to climb, the number of sellers willing to list their homes on the market and give up lower rates on their current mortgages became even smaller. As of the fourth quarter of 2022, nearly 92% of homeowners with a mortgage have a rate below 6%, and more than 82% have a rate below 5%, according to a Redfin analysis of Federal Housing Finance Agency data.
Essentially, even though there's very few people willing to buy a home right now, there's even fewer homes available to those who are currently in the market. Hence why we're seeing higher home prices even as rates spike.
Is it a good time to buy a house?
So, is now a good time to buy a house? Duncan says that his answer to this question is the same now as it was 20 years ago: If it fits your budget, it's the right time to buy.
"Because you don't know whether interest rates are going to go up or down in the long term, and you're simply making a housing decision, as opposed to an investment decision," he says.
For most people, it's not about trying to time the market.
"A lot of us are just buying a house to live in and take care of our household and family and all that," Duncan says.
Many hopeful buyers are planning to wait for mortgage rates to go down before jumping into the market. While this will definitely make getting a mortgage more affordable, you could end up facing even higher home prices by the time mortgage rates come down.
One advantage to buying now is that you'll avoid the inevitable increased competition and higher home prices that come with lower mortgage rates. Plus, you can save down the road by refinancing into a new mortgage once rates have dropped.
In fact, some lenders are even offering "buy now, refinance later" deals for those who buy when rates are high.
If you're considering buying now, be sure to shop around and compare offers to find the best mortgage lender for you. By getting multiple quotes, you can ensure you get a good deal.
Will home prices drop FAQs
When will home prices drop?
As far as housing market predictions for 2024, most experts don't believe home prices will drop — though the pace of increases could start to slow in 2024 and 2025. We'll probably see prices increase or stay relatively flat for at least the next few years.
Should I buy a house now or wait for a recession?
You probably shouldn't wait for a recession to buy a house. There's no telling when a recession might happen, and if it does, it might not significantly impact home prices. Additionally, a recession could put you in a place where you can't afford to buy a house, even if prices do come down.
Should I sell now or wait until 2024?
Home prices are high now and they're expected to rise a bit further in 2024, so whether you should sell now or later largely depends on how selling fits into your plans. Keep in mind that if you plan to buy another home, you'll have to deal with today's high mortgage rates, while those who buy in 2024 will likely snag lower rates.
Will mortgage rates go down in 2024?
Mortgage rates are expected to go down in 2024, and 30-year fixed rates they could potentially fall to near 6%.
Will housing be cheaper if the market crashes?
A housing market crash would make homes cheaper, but the reality for homebuyers isn't as simple as that. A market crash would likely cause economic distress in other sectors as well, making people less able to afford to buy a home. Experts don't currently expect the housing market to crash in 2024.
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