Will Home Prices Fall Further?

Executive Summary

Understanding residential real estate values vary by location, nationally home prices have begun to decrease. On a real, inflation-adjusted basis, values are down close to 10% from their 2022 peak (first graph below). Many have stated home values have not decreased along with the rise in interest rates because of low inventory. However, that appears to be changing, as the second two graphs indicate increases in both new and existing homes for sale. Builders are using incentives such as buying down mortgage rates to maintain high prices. Existing home sellers are clinging to higher prices, thus homes staying on the market longer and increasing inventory. With over indebted consumers, high interest rates and a weakening economy, buyers are hesitant to pull the trigger. Growing supply will likely mean lower prices. 

For further analysis, continue to read The Details below for more information.

“A shortage is a sign that somebody is keeping the price artificially lower than it would be if supply and demand were allowed to operate freely.”
–Thomas Sowell

The Details

Keeping in mind that residential real estate values vary upon location, national home prices have finally begun to decrease. This is occurring more in certain locations than others. In fact, some areas continue to experience rising values. Zillow recently announced their “typical home value” declined slightly on a national nominal basis. However, on a real, inflation-adjusted basis, values are down close to 10% from their 2022 peak, as shown in the graph below.

Many analysts have been scratching their head wondering why, with the slowing economy and high mortgage rates, home prices have not dropped more. The average 30-year mortgage rate is now around 6.8%. There are many different hypotheses about why prices have not come down, the most familiar being that inventory is low. However, that is simply no longer the case. Some areas in the south, such as Florida and Texas, have seen for sale inventory climb sharply. Notice in the following two graphs, new construction single family homes for sale are skyrocketing, approaching the real estate bubble peak, and existing single family homes for sale are also rapidly increasing.

It appears that sellers are clinging to the hope that home prices will remain around bubble highs. They have been reluctant to reduce prices. This is resulting in homes taking longer to sell, thus increasing inventory for sale. Eventually, sellers will be forced to lower prices if they want to sell. Builders are already offering incentives and buying down mortgage rates in order to facilitate sales. If owners of existing homes want to compete with the builders, they will be forced to drop their prices.

Notice in the graph below that existing home sales have plummeted from the 6.73 million units around 2021 to about 4 million units today. The March reading was down 5.9% or the largest monthly drop since 2022.

As mortgage rates remain high, builders are offering significant concessions to unload their mountain of inventory. Buyers are already suffering from high prices, and too much debt. The weakening economy is causing consumer sentiment to drop to record lows. A recession involving rising unemployment, combined with high interest rates, will limit the number of home buyers willing to pull the trigger. Growing supply and weakening demand will eventually push prices lower.

The S&P 500 Index closed at 5,525, up 4.6% for the week. The yield on the 10-year Treasury Note fell to 4.27%. Oil prices decreased to $63 per barrel, and the national average price of gasoline according to AAA remained at $3.15 per gallon.