Housing Market Prices Are Falling but This Is Why You Should Postpone Making an Offer for Now

In the real estate market, what you see isn’t always what you get. Whether it be a leak in the foundation discovered during an inspection, a surprise critter infestation revealing itself on the first cold winter, or the jaw-dropping monthly payment on a home with a seemingly low sale price, buyers can easily be blindsided by realities hiding just beyond the surface. 

The housing market has seen incremental declines in sale prices over the last couple of months.

Lower prices would normally might mean buyers could looking forward to slightly more manageable mortgage payments.

Unfortunately, when paired with current interest rates, the declining price does not necessarily reflect a cheaper investment cost for prospective homeowners. 

Sticker Prices Don’t Tell the Whole Story 

The National Association of Realtors (NAR) has reported that the median sale price of existing homes was $379,100 in October of 2022. This change reflects a drop from June’s record high of $413,800 but is still 6.6% higher than October 2021 figures. 

Although incremental rather than a full blown crash, it is promising news that prices are slowly on the decline, right? 

The piece of the puzzle missing on the for sale sign is the massively inflated interest (and subsequent mortgage) rates. The Federal Reserve (The Fed) has been working to level out inflation with increased interest rates, with the latest hike occurring on November 2

Although supporting a strong future economy, the increases are hampering buyers’ borrowing power in the here and now. Getting into that slightly cheaper sale-priced house could be just as difficult as purchasing the homes with higher price points six months ago. 

Black Night, a mortgage data company, reported that the median-priced home’s monthly principal and interest payment is up 73% from last year. 

If mortgage rates weren’t so inflated, a slow market would result in high inventory and less competition among buyers, all factors that could lend to lower prices.

However, due to the near record-high mortgage rates, those who locked in a couple of years ago at low rates are holding on tightly to their property, creating a limited inventory market. 

Home sales dropped by 5.9% month-over-month in October and 28.4% from the same time last year, NAR noted in its monthly update. 

According to NAR Chief Economist Lawrence Yun, “Despite weaker sales, multiple offers are still occurring with more than a quarter of homes selling above list price due to limited inventory.”

In a healthy economy, rising mortgage rates may not have as jarring of an effect. 

A strong economy affords employers the ability to increase salaries in accordance with inflation. Mortgage rates may still affect property value and prices, but they won’t be as significant as in a weak economic environment.

“More potential homebuyers were squeezed out from qualifying for a mortgage in October as mortgage rates climbed higher,” said Yun.

The last time the U.S. real estate market experienced a significant slowdown began in 2008, and at the time, homeowners’ wealth took a big hit but there is a marked difference between then and now. 

Where 2022 and 2008 Price Changes Differ

In the 2008 stall, housing inventory was four times as high as it is today, according to NAR. This figure is significant for today’s buyers because, as mentioned above, a high inventory typically lends to a lower level of competition. 

Zillow economists reported that the drop in prices resulted from motivated sellers willing to take a loss due to foreclosures and high inventory.

Nowadays, inventory is substantially lower than pre-pandemic levels, which means more buyers are competing for fewer homes and keeping pressure on pricing. This limited supply does not mean that prices will remain as high as they have been forever, though. 

Experts believe prices will drop further, but are managing expectations by noting that the 27% drop seen between 2006 and 2012 will not likely happen again. 

“I would be surprised to see prices anywhere drop below where they were in 2019,” said senior economist at Zillow Jeff Tucker, during a discussion with CNN. “There was some overheating in the housing market in 2021 through this spring that pushed prices higher than what the fundamentals would support. Now they are coming down.”

2023 Forecasts Favor Buyers

Purchasing a home in today’s real estate may be challenging, but don’t be discouraged. Experts are predicting prices to experience a steady decline in the coming months. These forecasts, paired with recent statements from the Fed around the easing of interest hikes, bode well.  

Predictions from Wells Fargo indicate that we can expect national median single-family home prices to drop by 5.5% year-over-year by January 2023. “If our forecast for Fed rate cuts is realized, mortgage rates are likely to fall slightly just as cooling inflation pressures boost real income growth.”

For the anxious home buyers asking themselves the question: is the American real estate dream still alive? Based on the data, it’s safe to say that the future looks promising. 

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Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.

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Tim Thomas has investments in real estate.

This post was produced and syndicated by Tim Thomas / Timothy Thomas Limited

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