Home Prices Have Soared 42% in the Past 3 Years. Here’s if Prices Might Come Back Down

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There’s a reason those high home prices have remained sustainable. 

If you’ve been struggling to buy a home due to not being able to afford one, well, there’s a reason for that. Home prices have risen 42% over the past three years, according to the National Association of Realtors (NAR). And while home price gains are slowing down, gains are still being recorded nonetheless.

The good news is that many experts think we can expect home prices to drop. But that doesn’t mean home prices are about to drop overnight. In fact, it could take quite some time for real estate prices to come down to more moderate levels. And one big thing needs to happen for homes to become more affordable.

We need inventory

In December, there were only 970,000 housing units for sale, according to the NAR. That represents a mere 2.9-month supply of housing units, whereas it normally takes a 4- to 6-month supply to balance out the real estate market.

Because there’s not enough housing inventory to meet buyer demand, and there hasn’t been in years, home values have been able to increase and remain high — even over the past year, as mortgage rates have climbed. And so for home prices to come down to a notable degree, we need a large uptick in inventory to hit the market.

It’s easy to see why the real estate market lacked inventory in 2020 and 2021. Back then, we were all grappling with the start of a pandemic, and sellers weren’t exactly rushing to list their homes. Meanwhile, in 2022, financial experts were quick to issue recession warnings, and many sellers no doubt held off on listing their homes to avoid upheaval in an age of potential economic distress.

The hope is that real estate inventory will pick up in the coming year or two. But it’s going to take a lot more homes to hit the market for prices to come down a lot. So anyone who’s been struggling with affordability issues over the past couple of years might continue to experience difficulties until things change.

Should you give up on buying a home in 2023?

It’s true that you might pay more for a home today than you would have three years ago. And you might also spend more to finance it with a mortgage loan given that borrowing rates are up.

But that doesn’t mean homeownership has to be off the table for you this year. If you’ve saved well for a down payment and have a steady job that allows you to earn a good income, you may find that you’re able to fit a home into your budget despite today’s higher prices and mortgage rates. But if you’d rather pause your home search for a while and try again in 2024, that makes sense, too.

Based on how low housing inventory is now, we can bank on it taking a while for supply to catch up to demand. And there’s nothing wrong with waiting things out and seeing what that does for home prices.

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