Are you waiting for house prices to drop? ‘You’re probably going to wait a long time,’ experts say | NextAdvisor with TIME
Feeling pressured by rapidly rising home prices, rising mortgage rates and rising monthly mortgage payments, buyers are wondering when the market will see some relief and home prices will begin to decline.
2022 has been tough for those trying to afford a home. In January, house prices rose rapidly, but at least mortgage rates hit record lows, providing some comfort to those trying to afford a home.
This is no longer the case. Mortgage rates have rapidly climbed towards 6%, rising two full percentage points since the start of the year. And at the same time, house prices have continued to rise, although the rate of increase has started to slow down a bit.
Experts say prices are unlikely to drop significantly nationwide anytime soon. And while the pace at which house prices rise will slow, it will likely come because fewer people can afford to shop in a more expensive market. At the local level, individual markets could see prices fall, but experts say a sharp drop across the board is unlikely unless there is a significant economic shift.
“You have this continued pressure around buying that even if we see dips, I think you’re going to see enough demand on the dips to keep house prices from falling by any real measure,” says Nicole Rueth, director production branch with the Rueth Team of Fairway Independent Mortgage Corp. “I think the appreciation will slow down to normal appreciation.”
What caused house prices to rise?
The median sale price of an existing home in May was $407,600, up 14.8% from a year earlier, according to data from the National Association of Realtors (NAR). House prices are rising dramatically, but the pace has slowed down a bit in recent months. Selling prices were around 20% higher year-over-year earlier in the year.
Behind this rise are two competing trends, each playing on a different side of the formula behind prices. The supply of available housing is declining, due to fewer people choosing to leave existing homes and the under-construction of new homes over the past decade. “We haven’t kept pace with the demand for homeownership for a decade now,” says Clare Losey, assistant research economist at Texas A&M University’s Texas Real Estate Research Center.
Demand is higher due to changing demographics – millennials are in their early years of home buying – and the rise of remote working allows more people to move away from jobs and hubs- cities. “General population growth will continue to put upward pressure on housing demand,” Losey said.
What will drive down house prices?
Prices will fall when supply increases significantly or demand falls, and experts say we are much more likely to see the latter. According to experts, one of the main drivers of the potential drop in demand is the drastic change in mortgage rates. The average 30-year fixed mortgage rate has risen more than two percentage points since the start of the year, reducing affordability for many buyers. Mortgage rates have reduced the purchasing power of buyers of a median-priced home by about 14%, Losey says. “Higher rates reduce a buyer’s purchasing power, which lowers the affordability of the purchase, or the maximum price of the home that is affordable to them,” she says.
Just because mortgage rates are up doesn’t mean demand will drop significantly, Rueth says. “Life events create need,” she says. “The need will be there regardless of the interest rate. But the speed at which interest rates move creates fear. The pace at which rates rose could have had the opposite effect and increased demand as buyers attempted to enter the market before it moved higher.
In some areas, there is already some price moderation, says Marty Green, principal of Texas mortgage law firm Polunsky Beitel Green. The ambitious prices sellers advertise are “a bit more realistic,” he says. Home sales are already slowing, with the NAR reporting that existing home sales in May were down 3.4% from April and 8.6% from the previous May.
Although price growth is likely to slow down, this does not mean that prices will go down. They will simply rise by less than the current rate, perhaps closer to 3% rather than 20%, experts say. Freddie Mac predicted that house price growth will slow this year, from 17.8% last year to 10.4% in 2022 and 5% next year. “First, the demand for homeownership has to go down,” Losey says. “If that happens and in a particular market there is potential for a better balance between the demand for home ownership and the supply of housing that comes with it, price growth should certainly moderate. This does not mean that house prices would go down, but the growth rate should certainly go down. »
To actually drop, there would have to be changes on the supply side – an influx of newly built homes, or lots of people moving and not just to other single-family homes. “You’re always going to have limited inventory across the country, so prices are likely to moderate,” Green says. “I don’t see them falling significantly in the coming months absent a real shock to the system, a really bad recession or something like that.”
Individual markets may vary
Of course, what happens nationwide doesn’t necessarily happen in your neighborhood. Some communities will likely see prices drop, experts say. “Each market is going to behave a little differently,” says Green. “Some of the markets and sub-markets within them are likely to stabilize more quickly simply because supply and demand will dictate.”
Some markets are more likely than others to see prices fall next year. For example, CoreLogic has classified the Lake Havasu City-Kingman and Prescott areas in Arizona, as well as Bridgeport, Connecticut, as having a very high risk of seeing prices decline over the next 12 months.
Even within a metropolitan area or state, different communities could see prices go down, Green says. Some areas may have too many expensive and extravagant homes, and the number of people who can afford them will decrease as mortgage rates rise.
Markets that have been the hottest in recent years could see declines if people who moved there during the pandemic decide they don’t have everything they want, Rueth says. “It’s so market-specific,” she says. “Some of these markets, I imagine maybe they’re dipping a little bit because they’re a little bit overexcited.”
A variable rate mortgage is riskier than a fixed rate mortgage, but it could make it easier to buy a home as prices rise. Just be aware of the risk and be prepared to refinance if rates drop significantly again.
What Homebuyers Can Do
Buying can always be a good choice. As house prices go up, so do rents, and if you buy a house with a fixed rate mortgage, your monthly payment will stay the same while the rent around you will continue to rise. Rueth says those who buy a home can get a “buffer against inflation”.
As you go through the buying journey, make sure you have a team of professionals. The limited supply of homes means markets are incredibly competitive, and while this may slow as demand declines, they will remain sellers’ markets. “Find good, trustworthy and reliable professionals who can guide you through this process. Go to a good mortgage lender and get pre-approved for a mortgage. So as you enter the home-hunting process, you’ll already have an idea of what’s affordable for you,” Losey says.
This also includes hiring an experienced real estate agent who can help you navigate a competitive market. “Since this is a seller’s market right now, it’s especially beneficial for buyers to try to work closely with professionals who have that experience and expertise,” Losey says.
Get off the beaten track
Buyers in hot markets might also have to get creative with the homes they consider, Losey says. “You’ll just have to be prepared to be quite flexible in these hot markets about what you want – space, amenities, location, etc., as well as types of financing,” she says. “Buyers are going to have to be prepared to resort to more non-traditional measures in very competitive markets because demand is so high.”
One way to combat rising mortgage rates is to consider adjustable-rate loans, Green says. Although ARMs carry some risk that the interest rate will increase after the initial term ends with a lower fixed rate, they offer short-term savings while giving you time to refinance if rates drop. “Look at some variable rate products that will have a positive impact on that affordability,” he says. “Don’t be afraid of these products because they might be the best answer for a lot of people.”
Patience is a virtue sometimes
High prices are out of your control, says Green. Focus on getting an affordable home for you when the time is right. “Be patient, but don’t be too patient,” he says. “If you’re waiting for the market to crash, that’s probably not the most likely outcome here and you’ll probably be waiting a long time.”