Housing Market 2023: Prices Continue on Downward Trend, Here’s What That Means
The U.S. housing market has been on a wild ride since early 2020. When the coronavirus pandemic struck that year, housing prices plummeted, right along with the stock market and the American economy. But shortly thereafter, prices skyrocketed in what could only be described as a housing boom, with bidding wars driving many prices above asking.
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As of spring 2023, however, the face of the market has changed yet again. In many markets, housing prices are now falling. The question everyone is asking is whether this is a short-term downtrend or something more severe, and what the dip in prices means for both buyers and sellers. Here’s a look at all of these questions in greater detail.
What’s Causing the Current Downtrend?
Like any market, the housing market is subject to the laws of supply and demand. Prices will rise and fall based on the balance between buyers and sellers. But what’s impacting this relationship in 2023, making home prices start to fall?
Too Far, Too Fast
The surge in housing prices from the pandemic low has been nothing short of breathtaking. In some markets, homes more than doubled in price in less than two years. For a market that typically trends up by only a few percentage points per year, this was a remarkable move. This dramatic rise in prices has helped make homes more unaffordable, which in turn reduces demand. As fewer buyers enter the marketplace, home prices tend to weaken.
Rising Mortgage Rates
The other culprit in making homes unaffordable for most buyers is the steep rise in mortgage rates. Whereas homebuyers in 2020 were enjoying record-low mortgage rates below 3%, even buyers with top-tier credit may have to pay 7% or more. For a $300,000 mortgage, this means payments have jumped from about $1,200 to closer to $2,000. At those levels, many buyers are no doubt holding off on their purchases until payments become more affordable.
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What Might Cause It To Stop and/or Reverse?
If there’s anything the housing market has taught Americans over the past three years, it’s that price trends can change fairly rapidly. Although the overall trend in American home prices is down at the current time, that may stop or even reverse under a few different scenarios.
Inventory Isn’t Really Opening Up
Typically, when home prices rise rapidly, more homeowners are willing to put their properties on the market to snag those profits. But even with the huge price gains in recent years, home inventory hasn’t really opened up, as Americans are stubbornly holding on to their properties. One of the main reasons for this is that nearly all homeowners are lucky enough to have very low-rate mortgages. In fact, a recent study by Redfin notes that about 85% of homeowners have a mortgage rate below 6%, and in some states, more than 90% carry a rate below 5%. Many homeowners have rates below 4% or even 3%. With those types of mortgages on the books, homeowners are understandably reluctant to sell their homes and move somewhere else, picking up a 7%-plus mortgage rate in the process. If inventory remains tight because of this, prices may hold steady or even start moving up again.
Mortgage Rates Might Soon Reverse
The Federal Reserve has aggressively raised interest rates in 2022 and 2023 in an effort to stave off inflation. However, most economists expect the Fed to stop raising rates sometime in 2023, meaning they might begin to fall again at the end of the year or into 2024. If mortgage rates follow suit, pent-up homebuying demand may once again flood the market, pushing prices back up.
What the Downtrend Means for Buyers
A downtrend in home prices is always a good thing for buyers. The problem for buyers is not that home prices are falling but that they have only dropped a relatively small amount, and from highly elevated levels. Buyers may want to wait until a true housing price correction sets in before they jump in with both feet.
What the Downtrend Means for Sellers
Just like with the stock market, it’s hard for sellers to get out right at the absolute peak. But even with the small pullback in home prices in 2023, most Americans who bought a home in 2021 or earlier are likely sitting on a good-to-exceptional profit. Selling now may not get these homeowners peak prices, but it’s still a seller’s market in most areas. However, thanks to high prices and high mortgage rates, it may take some time to find a buyer until prices settle a bit.
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This article originally appeared on GOBankingRates.com: Housing Market 2023: Prices Continue on Downward Trend, Here’s What That Means
