Home Prices Are Dropping, but Are Not Expected to Crash

Home prices have seen a significant increase since the financial crisis in 2008-2009, more than doubling nationally. But that streak of higher prices seems to be coming to a halt, with prices expected to fall throughout much of the country. The decrease will happen slowly over the next few years, but the places where prices surged in the last few years will see a more significant decline going forward.

According to the Washington Post, the impending drop in house prices is mostly due to the recent surge in mortgage rates, having increased from record lows below 3 percent a year ago to around 6 percent today. Lower rates and limited housing supply forced prices higher, but with prices still high today, housing affordability and demand are taking a hit, locking many potential first-time buyers out of the market.

Yes, house prices are poised to correct. But they are highly unlikely to crash. While single-digit nationwide peak-to-trough price declines seem inevitable, declines of over 20 percent — like we suffered in the housing crash over a decade ago — seem improbable. A key difference is the current shortage of homes. The percent of homes for sale that are vacant is as low as it has ever been, and the vacancy rate for homes for rent is close to its lowest. Home builders have struggled to keep up with the households that formed since the financial crisis, most recently because of the disruptions to supply chains for building materials and appliances. A decade ago, housing was vastly overbuilt, and the housing vacancy rate was at a record high. The current shortage of homes puts a figurative floor under house prices.

Read more