Currently, inflation is running rampant, harming the budgets of most households. Plus, the Federal Reserve raised rates again, and by a higher margin than most expected. In both cases, that can make buying a home harder, which many would assume would drive down demand. While a housing market crash isn’t necessarily on the horizon, most people wouldn’t be surprised if the home prices were shifting downward. But is that actually what’s happening? If you’re wondering, “Are housing prices finally dropping?” here’s what you need to know.
Are Housing Prices Dropping?
In many parts of the country, housing prices are starting to decline. With mortgage rates rising due to increases in the Federal Reserve rates, sellers may have to take a different approach to find buyers. By reducing prices, it makes properties more enticing, which could lead to a quicker sale.
However, that doesn’t mean housing prices are universally dropping. During a four-week period that ended in late May, about one-in-five sellers dropped their asking price. While conditions have changed since, that shows that not all sellers are going to alter their listings even as the market changes.
In time, the decline in prices may become more common. However, that also depends on your location. For example, prices were still rising in the Seattle area as of early June 2022. However, the available inventory was also trending upwards, and sales were slowing, so a change is potentially on the horizon.
Generally, whether housing prices are falling near you depends on supply vs. demand. In some areas, the increasing interest rates dramatically altered demand, leading to far higher supply. In those regions, prices will typically fall faster than in hot housing markets that are only seeing slight changes in demand or have had a demand vs. supply imbalance so severe that it will take time to level out.
Is Demand for Homes Shifting?
In a broad sense, demand for homes is declining. Higher interest rates and high inflation are pulling aspiring buyers out of the market in some cases. Essentially, both of those factors made transitioning to a new house far more expensive. Plus, many potential homebuyers will hesitate to make a big financial commitment with inflation as it is currently.
Additionally, the number of active listings isn’t necessarily growing substantially in some areas. Many aspiring sellers are aware that conditions aren’t ideal for quick, high-profit home sales. As a result, those who viewed selling as optional aren’t rushing to list. Instead, listings are mainly comprised of those who feel a sense of urgency about selling their property.
Declining inventory can also shift demand. While inventory levels were low previously, it was partially because borrowing was so affordable. Buyers were quick to jump on houses with potential, largely because of concerns that they wouldn’t have options if they waited.
Now, if decline in inventory is related to hesitant would-be sellers deciding that waiting for conditions to improve is a better choice, this alters the market in a different way. It could reduce the availability of homes that buyers find enticing, which could also impact demand.
Are Housing Inventories Declining?
Whether you see a decline in housing inventory is mainly based on where you live. Among the 400 largest housing markets, inventories rose in about 332 of them as of early June. In fact, many of them are increasing by 40 to 55 percent. While that seems like good news for buyers, it isn’t entirely what it seems.
Even in areas with inventory growth in that range, many of them have levels far below what was there pre-pandemic. As a result, many regions technically have an incredibly limited supply, preventing conditions from full favoring buyers.
Additionally, not every city is seeing increases. In the top 400 markets, around 68 housing markets either have declining inventory or are approximately the same. Further, those numbers don’t account for smaller markets, which could be going either way.
Even if conditions remain the same for months, if not longer, that doesn’t guarantee that inventory levels will rise quickly. As mentioned above, some sellers have the luxury of time, so they aren’t hopping into the market. Instead, they’re waiting to see if conditions improve before listing.
However, some sellers can’t afford to wait, which will lead to new listings. In areas where sales continue to slow, that could pump up inventory levels significantly. However, it may take longer than you’d expect to reach pre-pandemic inventory, so keep that in mind.
Will Prices Drop If the Federal Reserve Raises Rates Again?
The likelihood that the Federal Reserve will raise rates again – potentially multiple times through 2022 and into 2023 – is high. Usually, rate increases are a means of limiting inflation, making borrowing less enticing and encouraging saving. As a result, it alters economic activity, which can keep prices in check.
If the Federal Reserve raises rates again, it will undoubtedly impact the housing market. When mortgages get more expensive, it reduces the number of potential buyers. In turn, it can create a buyer’s market, leading sellers to lower prices as a means of securing a sale.
However, every housing market is different. Additionally, price reductions depend on the action of sellers and available market inventory. Whether a seller can afford to wait to list until conditions improve may influence inventory levels, potentially keeping them below pre-pandemic levels for far longer than most would hope. Plus, the supply vs. demand equation may favor sellers in some markets regardless of raising rates, which could keep prices either steady or may leave them generally trending upward in specific areas.
Ultimately, prices will potentially decline on average, or growth will stagnate in many markets if the Federal Reserve raises rates again. Whether that works out well for a potential buyer mainly depends on their location, as that ultimately plays a big role in the prices they’ll see and whether they’ll benefit from a decline.
Are you hoping that housing prices will finally start dropping, or would inflation and higher interest rates prevent you from buying a house at this time? Do you think a housing crash is on the horizon and want to see if you can capitalize on that? Share your thoughts in the comments below.
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.