Is There Any Chance Housing Prices Will Go Down Soon?

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We’re in the third year of a strange housing market, with record-high home prices. Here’s what it will take to cool the market. 

The short answer is no; home prices are unlikely to drop soon. At the heart of the matter is low inventory. Barring a significant event, homeowners will be in no hurry to leave the low interest rates secured during the pandemic. And as long as home prices remain elevated, homeowners won’t want to sell their current homes only to pay more than expected for a new house.

How the housing market got here

Current home prices are a result of the perfect (or imperfect) storm. That storm includes:

Low inventory: For the above reasons, there are not enough homes on the market to drive prices down.Continued demand: Despite high home prices and interest rates, there continues to be more potential home buyers than homes for sale. While there may be fewer applications for new mortgages than during the height of the pandemic, there is still a steady stream of buyers.Record equity: Current homeowners have record equity in their properties. When they do sell, they’re in a better position to compete for the few homes on the market.Economy and employment: The economy grew by 4.9% in the third quarter (July to September). In addition, inflation is slowing, and the unemployment rate has been below 4% for 20 months. Real wages are up, and the median wealth for American households has grown. In other words, there are plenty of jobs and people willing to take on a mortgage loan.

Breaking the log jam

Just as several factors went into rising home prices, several things must happen to drive prices down:

New home construction: The more homes constructed, the more options buyers have. Better yet (for buyers), there is less competition to drive prices up.Slowing economic growth: As mentioned above, the economy is doing better than expected. Unfortunately, it’s a stalled economy that is most likely to reduce demand for homes.Affordability challenges: Two things could challenge a home buyer’s ability to afford a home. The first is a slowing economy and job loss. Even if they can qualify for a mortgage, a home buyer may not be inclined to purchase if they are unemployed. The other affordability challenge is simply this: At some point, home prices will outpace what the average home buyer can afford.

What you should do if you want to buy

If you’re moving to a new city, consider whether you’d prefer to rent until home prices, interest rates, or both cool. Of course, there’s always the possibility that home prices will take another bounce as interest rates drop, driving up competition even more. Since nobody knows for sure what the market will look like in the near future, here’s what you should do if you plan to buy:

Decide how much you can afford

Don’t forget property taxes, maintenance, and other expenses associated with being a homeowner.

Consider how long you plan to remain in the home

If you’re paying far more for a home than it was worth pre-pandemic, you may find yourself in a pickle if you attempt to sell too soon. Let’s say you pay $400,000 for a house that would have sold for $275,000 just before the COVID-19 outbreak. While we have no idea how much home prices might soften, imagine that houses in your neighborhood are worth 10% less once the market normalizes. That means your $400,000 home is suddenly worth $360,000 ($400,000 x .10 = $40,000). If you plan to sell soon, you could make less on the house than you need to recoup your investment.

Decide how much you are willing to spend and stick to that limit

One of the most challenging things to do in a competitive market is to stick to a budget. No matter how much you want a property, few things are more miserable than being house poor.

Find the right real estate agent

A good real estate agent shows you homes in the areas you’re interested in. A great real estate agent offers advice, but never pushes you into a contract that’s wrong for you.

Do not waive contingencies

To entice a homeowner to accept their offer, some home buyers have waived their right to contingencies, like a home appraisal (to ensure the house is worth what you’re offering to pay) and a home inspection. Let’s say you decide to skip the home inspection, but upon moving in, you learn that there is black mold or some other major issue. You have no recourse. You can’t go back to the seller because you’re the one who agreed to waive the inspection. Even if it means losing out on a house, be careful about giving up your rights.

It’s been an odd few years for home sellers and buyers alike. Naturally, we’d all like to know which way the wind is blowing and what’s likely to happen next. Unfortunately, we’ll have to wait to know for sure.

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