Will Home Prices Fall?
People inquire frequently about home prices and when they’ll begin residing, but it just never seems to happen.
What both real estate agents and housing market economists conclude is that falling prices can’t happen given that housing demand far exceeds supply. And the what of demand is about the type. Gen Z’s and Millennials are a massive market trying to start their own families. Which means demand for homes isn’t about how many willing buyers are in the pool or a cheap price — it’s about their urgency.
It’s about these demographics, their demand profiles and their incomes. Because many will pay anything they can to own a house. And the when is about falling mortgage rates and when rates hit a certain level where purchases really take off.
But there is the matter of credit ratings, buyer qualifications, and down payments on homes that keep rising in price. Buyers are a determined lot however, willing to stick their necks out for outrageously expensive homes and condos. Being overleveraged on a mortgage when there is a threat of a housing market crash is obviously unwise.
And an economic setback and stock market crash have to be considered as well, since the housing market doesn’t exist in a vacuum.
Will Home Prices Drop?
What determines a price drop:
- mortgage rates
- economic outlook
- bank willingness to lend
- home price trends
The question becomes about the exact month where locked-in homeowners can finally unload their properties. This depends on FED decisions on mortgage rates and refinancing rates, and on political actions as these determine employment and consumer optimism/spending.
When home prices reach an unserviceable point (this fall?), homeowners will list. They’re already listing. NARs latest report shows unsold existing home inventory increased 3.1% from the previous month to 1.32 million at the end of June, and up +23.4% from one year ago (1.07 million units).
“We’re seeing a slow shift from a seller’s market to a buyer’s market. Homes are sitting on the market a bit longer, and sellers are receiving fewer offers. More buyers are insisting on home inspections and appraisals, and inventory is definitively rising on a national basis.” — said NAR Chief Economist Lawrence Yun.
Critical Events for Housing Market
FED rate decisions are key for timing of listings and buying. Yet, rates aren’t expected to decline 2% for 2 years. This means their is no immediate catalyst for buying. On the contrary, lingering high mortgage rates and high refinancing is likely to be the key factor in new home listings, thus pushing more houses onto the market.
A lot depends on the Nov 8th election as vote for President Trump will lead to a big US economic boost and a big boom in sales for Realtors. His offer of reduced taxes is a big incentive for builders which would help ease the supply shortage. Currently, builders are not confident and new permits and starts have diminished.
As Census.org’s graphic shows, new starts are trending down despite a small rise in June.
Signals of an impending price drop:
- the housing market is overheated, inflation is rising, and the bubble could burst due to an all round abandonment of the market
- workers are returning to the city to work and find a condo/apartment, and may sell their house far from the city
- The current US administration can’t agree on a stimulus bill this summer with the Republicans
- weary buyers are giving up because of the intense price competition and mortgage qualification demands
- home sellers are getting worried that this may be the peak of the market this summer
- new home construction could pick up and flood more homes into the market
- pandemic destination buying is just about over
- inflation and home prices rocketing upward
- Federal and state government debt hitting ceilings while trade deficits signal mounting failure
- the Fed could jump interest rates up while believing it won’t hurt much
- the Dems big spending, high debt servicing, anti-fossil fuel, high tax agenda could implode into the next major recession
It’s wise to check out the best cities with the lowest home prices, find good neighborhoods that have some gems. Is there a time of year when home prices might fall? Find opportunities.
Case Shiller’s report shows home prices following a downward path similar to 2022, a particularly bad year for housing.
From San Francisco to Los Angeles to Denver and Seattle all the way east to Chicago, New York and Boston, homebuyers are asking when will house prices drop? See the housing forecast pages for the 5 year outlook. The chart below shows house prices will only fall during a major recession.
Rocketing Home Prices Must Eventually Crash
What goes up really high, is likely to come crashing down in the event of an economic event. While the risk is highest in the stock market for a crash, the housing market is subject to big economic disappointments. A setback for the US economy would definitely result in homes being dumped onto the market.
A Democrat win in the White House in November would dash investors hopes and prevent big tax breaks for Americans. Many homebuyers would be okay with that, but those who hold real estate assets comprise a large influential group of voters and they would not like to see their holdings plummet in value. Some may be highly leveraged and exposed. The CME market is very vulnerable.
A Better Question: How High Will Home Prices Rise?
As unemployment stays near historic lows, wages rise, GDP regains momentum, immigration continues, and as construction starts do not keep pace, house prices can only rise in the major metros in 2024 and beyond.
This graph below from FRED helps us see how ineffective previous mild recessions were in reducing home prices.
Certainly the financial crisis hit us all hard, but notice the gradual, halting climb since 2013. That shows a more managed market that won’t form a bubble. It appears to be heading a long increase until there is simply no more demand.
Robert Dietz, chief economist for the National Association of Home Builders cites a “perfect storm of supply side challenges.” In an interview, he said the residential construction industry is grappling with a prolonged labor shortage and a scarcity of buildable land.
With those issues resolves, what’s stopping a return to 41% level bidding wars across the nation in 2025?
This chart shows the effect of the pandemic for housing supply and that in the last year, high lending rates have discouraged builders from risking housing projects, despite the demand. Builders do comment that land zoning, availability and financing costs are key issues for them.
Existing homes sales in the US is expected to climb back to pre-pandemic levels next year, however buyer volume has greatly increased since 5 years ago.
It’s the same in Canada as heavy demand is growing home prices and rent prices in Toronto and Vancouver. Demand is spreading outward into rural areas where very little housing is being built. The commitment to construction of affordable housing simply isn’t there, and demand for homes $200k to $300k continues. In Toronto for instance, housing supply is drying up severely setting the stage for huge jumps in prices, creating bubble like conditions. Some are warning of danger in the Toronto housing market. Yet Toronto’s economy is hot, which will only fuel big price hikes thorugh 2020.
It’s same situation in US cities, except US buyers have much more money.
As discussed in the most recent housing market forecast and update, prices rose for the 91st straight month. The median price for existing-home of all housing types in September was $272,100, up 5.9% from 12 months ago ($256,900). Prices rose in all regions.
The political and media mood in the US has been very negative as well. If the constant stream of down talking of the economy, trade, and housing ends, we can expect and additional boost just on optimism.
For a fall/winter economy, this one seems to be excellent.
According to NAR, total houses available for sale at the end of September was 1.83 million units. That’s the same as August but is down 2.7% from 1.88 million units one year ago.
Zillow’s Home Price Forecast 2020
NAR recently said that if this recession happens, it will be short lived and that the housing market would not follow an economic plunge.
“I don’t think we’ll get back all the way to … the frenzy we saw at the beginning of 2018,” says Chief Economist Danielle Hale of realtor.com®. But “it’s certainly a possibility that home sales and prices will pick up, especially if mortgage rates stay low.”
When will home prices actually drop? A conservative guess would be in 5 years when buyer demand is satiated and the economy cools.
If the Dems can impeach their rival, and beat the Republicans in the 2020 election, we might see a drop in prices. But the experts have said that even if the Dems ruin the economy, it wouldn’t be enough to ease demand for housing.
Don’t bet on house prices dropping in the United States anytime soon. And a housing crash? Come on.