What’s going on with home prices right now?
Though the real estate industry has been collectively holding its breath since the coronavirus pandemic started more than two years ago, a consensus has emerged this spring that the market is changing. Economists are seeing a shift. So is Gary Keller. Fannie Mae is predicting a recession. And mortgage rates are suddenly higher than they were just months ago.
The result is growing pressure on home prices. And though its still relatively early days in this story, two things are clear: First, home prices are still rising. They haven’t collapsed, and are not expected to in the near future. But second, sellers are losing some of their advantage and are having to reduce what they’re asking. That doesn’t mean prices are dropping, but it does suggest price growth will slow down and a more balanced market may return.
What’s happening with prices now?
The big picture with prices right now is that the market is in flux.
Data that Zillow provided to Inman indicates that the share of homes that are experiencing price cuts is rising. Though the data shows significant seasonality when it comes to price cuts — more listings had price cuts last fall than this spring — the numbers ticked up in April compared to March, and in March compared to February.
Perhaps even more significantly, the data shows that the share of homes taking price cuts in April is higher than it was last spring.
Additional data shows this trend continuing into the present: A report from Redfin showed that as of the end of May, 20.1 percent of homes dropped their prices sometime in the previous four weeks. That’s up compared to the previous month, and year-over-year.
“This was the highest share since October 2019,” the report notes.
In a conversation with Inman, Redfin Deputy Chief Economist Taylor Marr pointed out that these numbers mean that “one in five homes that are on the market today have reduced their price within the last four weeks.” He added that such numbers represent “a pretty significant number of price drops.”
“Price drops really have been jumping and skyrocketing,” Marr added.
In addition to a growing number of price cuts, Zillow’s data further shows that the amount of money sellers are knocking off their asking prices is growing. In December of 2017, the mean price cut amount across the entire U.S. was about $12,126. But by April of this year, the mean had risen to more than $23,103.
Speaking of the uptick in price cuts, Redfin noted in a recent report that “May marked a turning point in the pandemic housing frenzy.”
It might be tempting to read these numbers as the beginning of the sky falling. But it’s also worth noting that a shift is not a collapse, and while the competitive landscape is changing, the data shows that prices are still rising.
Case in point: Redfin’s data reveals that in May, the median sales price of a home was still up 16 percent year-over-year, hitting a record $400,999. Median asking price was up even more, by 17 percent, and 57 percent of homes sold over their asking prices — a record number and up from 51 percent a year ago.
Zillow data shows the same thing, with median listing prices continuing to rise steadily since the beginning of 2018.
Recent gains have carried median listing prices to record highs, and the data shows that prices remained strong and avoided some normal seasonality during the back half of 2021.
Marr said economists have been expecting price growth to slow down for a while now, and some of the data about the current market may lag in its ability to reflect actual conditions. For example, some ongoing deals may have locked in lower interest rates from months ago.
But the fact that price growth hasn’t slowed down more already has been somewhat surprising, according to Marr. He speculated that pent-up demand, rising wages and concerns about inflation have allowed the market to outperform some forecasts even as interest rates and prices have continued rising.
Realtor.com made a similar point. In an email, a company spokesperson told Inman median listing prices “maintained a surprising amount of momentum this week even as recent monthly data show signs of a growing gap between buyer and seller expectations.” A report from the company further noted that “housing remains expensive and fast-paced with the median asking price at a new high while time on market is at a new low. ” Properties are still flying off of the proverbial shelf.
“Nationally, the typical home spent 31 days on the market in May,” the report notes, “down 6 days from the same time last year and down 40 days from May 2020.”
The overall takeaway here is that the seller’s hand has weakened. In more and more cases, they are having to cut prices, and those price cuts are becoming more significant.
But cuts themselves do not mean that appreciation has stopped, and in fact the prices for which homes are actually closing — even if lower than what homeowners had dreamed up — are still on average up considerably compared to last year. In other words, price cuts and price appreciation reflect a gap between seller and buyer expectations, but can also coexist.
What will happen in the near future?
The reason any of this matters is because all of this data hints at what is likely to come over the next few months or years. And Marr said that while prices continue to rise, he does envision “some downward momentum in terms of actual sales price growth.”
“I do think we’re observing demand pull back,” Marr added. “We would expect price growth to decelerate.”
Realtor.com’s report also pointed to “moderating buyer demand” as a major factor of what is going on right now, and noted that inventory is actually increasing.
A recent report from Zillow also points to this rise in inventory and notes that “faint signs are starting to emerge that a more balanced market is around the corner.”
Like many other economists who have spoken with Inman in recent days, Mar does not believe there is a housing bubble on the horizon. He attributed recent price gains in the housing market to the strength of the sector’s fundamentals, and he believes mortgage rates are likely to stabilize and not rise significantly beyond their current levels.
The overall result is that nationally home price growth may cease to make the double digit percentage gains that have dominated the last two years.
However, Marr does not think that overall the U.S. housing market is likely to see price drops.
Still, some specific markets could buck that trend and see price declines. Marr pointed to places, such as Boise, Idaho, and Austin, Texas, where home prices have grown far higher and more quickly than in other cities. Such markets have benefited from an influx of coastal transplants, many of whom can now work remotely.
Areas with those dynamics could see less future price appreciation in the near future, or could even see dips.
“Places like Boise, or the [markets] that have appreciated the most, are most at risk for price growth to be flat or be negative,” Marr said.
Other cities Marr mentioned as being in this category include Sacramento, California, Tacoma, Washington, and Denver, Colorado, among others.
“Those are the ones that have pretty high rates of price drops right now,” Marr added. “And that definitely would indicate that they have much less price momentum.”
Why is all of this happening?
As Inman has previously reported, mortgage rates are a major driver in the ongoing market shift. As of June 2, the average rate for a 30-year fixed rate mortgage was 5.09 percent, according to Freddie Mac. That’s a huge increase from the high 2 percent and low 3 percent range that dominated the last year.
“The rate of growth was unprecedented and way above the bounds of what any one expected,” Marr noted.
Zillow’s report points out that such increases mean that “today’s buyer must look at an entirely different price range.” And Realtor.com’s report also repeatedly mentions mortgage rates as a culprit behind shifting market dynamics.
However, it’s not just rates. Instead, housing prices themselves are also a stumbling block for many buyers, with Zillow’s report noting that “soaring costs are posing an affordability challenge.”
Whether or not current conditions hold remains to be seen, and Marr noted that economists’ forecasts about the market have been off before during the pandemic. But what is clear is that there is a shift happening in the market right now, and it is going to influence how much sellers can ask and what buyers will pay.
“It does appear,” Marr concluded, “that right now we’re sort of at a turning point.”